Baker & Taylor

The sea change that comes with the latest iteration of the book ecosystem

In the past 10 years (since the mid-2000s), the ebook has arrived and the amount of shelf space for books in physical retail has declined, as book purchasing has continued to move to the Internet. This has put pressure on publishers’ distribution costs, as we discussed in a prior post.

In the 10 years before that (mid-1990s to mid-2000s), online bookselling began at what was, we now know, the very peak of book retailing, when the superstore chains B&N and Borders had built out hundreds of 100,000+-title stores and still owned mall chains Dalton and Walden that had many hundreds of smaller stores. And that was on top of the largest-ever network — many thousands — of independent bookstores, many of which were themselves superstores.

In the 10 years before that (mid-1980s to mid-1990s), Wall Street cash enabled the two big bookstore chains to build out their superstore networks, stocking publishers’ backlists deeply. With so many enormous stores opening, publishers received a bonanza of store-opening orders that went deep into their lists and were relatively lightly returned (until the store-opening process reversed itself 20 years later).

In the 10 years before that (mid-1970s to mid-1980s), the two mall chains (Dalton and Walden) rode the growth of shopping centers to a position of great importance in selling books to the public. They became the drivers of the bestseller lists. In the same decade. Ingram and Baker & Taylor built reliable national wholesaling networks, enabling the chains and a growing number of independents to replenish stock of unsold books quickly, increasing stock turn and profitability for booksellers (and lowering returns to everybody’s benefit).

In the 10 years before that (mid-1960s to mid-1970s), the department stores started to yield their strong position in book sales, victims both of their own structured discipline (open-to-buy rules) about inventory control that reduced their title selection and of the growth of the malls. The malls inadvertently doomed the department store concept (even though department stores were the “anchors” that made malls possible) by enabling specialty retailers of all kinds, including bookstores, to provide a better shopping experience than the department that sold those goods in the department store.

In the 10 years before that (mid-1950s to mid-1960s), an increasingly affluent society saw an ever-expanding number of bookstores while, in that era, mass-market paperbacks became ubiquitous in drug stores and newsstands, vastly increasing the number of places where Americans could find and buy books.

And the 10 years before that, which takes us back to the end of World War II, saw the birth of mass-market paperbacks and the development of modern publishing sales forces in trade houses. This was, in retrospect, the beginning of a half-century of uninterrupted growth for American book publishing. It has not necessarily now come to an end, but the growth of the segment controlled by big publishers may have ended.

What happens now? The online book market is likely more than half of the total book market. That is, books purchased online — print and digital — exceed the number sold in retail stores (obviously all print). Amazon is the single most powerful retailer, and they have also made themselves the first stop for any self-publishing or small-publishing entity that wants to reach readers. Ingram and the bigger publishers offer full-line distribution services to the most ambitious of those and to everybody else who wants to reach the whole book market.

Until the last 10 years, all the developments that affected book publishing tended to grow the availability of books relative to the availability of other media. When mall stores or superstores grew, there was no associated lift for television shows or movies (although recorded music also benefited from the malls). That is no longer the case. For the first time, really, books are competing with everything else you might read or watch or listen to in a way they never did before. Online doesn’t care what is in the file it displays. This is a qualitative difference in the nature of book availability growth compared to everything else that has happened in the lifetimes of anybody in the business.

The fact is that books used to live in a moated ecosystem, independent of what was going on in other media and book readers’ communication streams. Since ubiquitous broadband, that is no longer true. This presents publishers with two challenges they never faced before.

One is to take advantage of the opportunity to promote books to readers by tying them in to other media and events in ways that were never before possible. This is digital marketing promoting discovery. In fact, a greater percentage of the potential audience for any book should know about it within a few months of its publication than ever before, if publishers do their jobs right.

But the other is that publishers need to be alert to changes in book reading habits that are bound to occur because of integrated media. Yes, the publisher can promote the book to somebody watching a related video or reading an email on a related subject. But it is also true that promotion for movies and emails from friends can interrupt a reader in the middle of a chapter if they’re reading online. This is probably changing the way people read books and might even change how they want their books edited and shaped. Publishers who pay attention will see those changes as they occur.

We can interrupt people doing something else now to tell them about a book. But they now, in turn, can easily be interrupted while they’re reading the book. Digital change and media integration cut both ways. It is very early days for this reality. It only really occurs because of the combination of broadband and reading on an Internet-enabled device. That’s a relatively recent and still-growing circumstance. We don’t know where it will lead.


Four players in the book business with the power to rewrite some of the rules

The news came last week that ReaderLink has purchased Anderson News. Those two companies have been the leading suppliers of books to the mass merchandisers: primarily Wal-mart, Target, and Sam’s Club. There are other players selling books in the space, including Ingram, Baker & Taylor, and smaller distributors like the less-well-known American West. But most of the books going to most of the mass merchant accounts have gotten there through what will now be one company supplying them: ReaderLink.

By my count, that puts four companies in the book business who have extraordinarily powerful holds on their space. They are ReaderLink in the supply of books to mass merchants, Amazon as an online retailer, Barnes & Noble as a bricks-and-mortar retailer, and Penguin Random House as a commercial trade publisher.

ReaderLink, Amazon, and Barnes & Noble now have extraordinarily powerful positions from which to demand better terms from their publisher-suppliers. In all three cases, they have customer bases which are extremely difficult, if not impossible, for a competitor to take away from them.

Amazon has pretty much owned the online book customer since the year they opened for business in 1995. There is a faint hope that fragmentation of the online marketplace and the placement of commerce in the social stream, such as is enabled by Ingram’s technology, could wrest some of their share. Perhaps, over time, that will happen. But they keep pulling further ahead of their only real competition,, and I am not aware of even one single reporting period when Amazon’s share of the online book market hasn’t grown. It is simply not an option for a publisher who wants to sell to consumers to avoid Amazon. (The only way a publisher could conceivably do that is if their customer base is reached entirely by direct sales or through intermediaries outside the book business.)

Barnes & Noble may be losing brick-and-mortar market share to independents, but they remain by far the leading bookstore chain. If a publisher wants books in the retail marketplace, Barnes & Noble has been, since the demise of Borders five years ago, the only one-stop way to get national coverage. In fact, they almost certainly control the majority of bookstore shelf space in the country, and their single biggest competitor, Books-a-Million, has fewer than half as many stores. And B-a-M’s stores are smaller.

ReaderLink is now in a similar position vis a vis the mass merchants. These stores constitute the other big component of the store retailing system and they are critical for bestsellers, mass-market paperbacks, and “merchandise” like adult coloring books and kids books. In fact, ReaderLink and Anderson lived with what was a “managed competition” controlled by their accounts; they each had stores assigned to them by their mass merchant customers. Publishers have always had to deal with both of them in order to place their books in the mass accounts. And, indeed, it could be that there will be efficiencies to this consolidation that will be beneficial for the publishers. But, if there are, it is also quite likely that ReaderLink will find ways to adjust their terms to take at least some of the benefits back and they are likely to be successful persuading publishers to allow that. (They have also manifestly strengthened their negotiating position with those accounts that are committed to stocking books.)

There is a fourth powerful player: Penguin Random House. PRH is almost (but not quite) the size of the other four members of the Big Five combined. As such, they are in a position to do things in the marketplace that no other publisher could contemplate. Since the merger of Penguin and Random House, I’ve written about what they uniquely could do with their marketplace power. The two key suggestions, neither of which has drawn any evident interest from the management at PRH, were a program to supply non-bookstores with vendor-managed inventory (creating store retail accounts nobody else would have) and to create their own ebook subscription service. (That would also create unique distribution.)

The new combination in mass-merchant supply could suggest another such opportunity. Perhaps this one will be more compelling.

The supply of books to mass merchants, as to any account that is not primarily in the book business and comfortable with both the logistical challenges and relatively low profit potential in books, is complicated, expensive, and usually inefficient. The number of titles that actually make it into these stores is a paltry percentage of the industry’s output. Only the biggest publishers have enough of the right books to really play.

And then the publisher has to cover both the retail accounts that will ultimately sell their books and the distributor-intermediary that supplies them. It will be a bit easier for the big publishers selling books to Wal-mart and Target to manage the business through one big account rather than two (one fewer account to deal with), but it is still a frustratingly inefficient segment of the business. (The one fewer account aspect of this is bound to be causing some nervousness right now in the sales departments of some publishers.) Visibility into inventory status is, relative to the store-level view available at Barnes & Noble, klunky. Returns are high. Responsiveness to breaking events is slow. And the margins are worse than for any other part of the domestic business.

But part of the reason for that is that delivering on the service requirements for these accounts is expensive. One sales executive I spoke to estimated that ReaderLink has more than 2500 detail people calling on the outlets of the mass merchants: checking stock, tidying fixtures, and replacing sold books. No wonder these distributors need hefty margins to do this work. And this also explains why Ingram and Baker & Taylor, who, of course, carry all the titles these merchants would ever need, don’t appear to move aggressively to take this business away from the incumbent(s).

To picture the Penguin Random House options, I try to view this from the perspective of one publisher with about half the books that these mass merchant accounts need. I’m giving away margin to a middle player that adds a layer of inefficiency and cost in order to be an effective aggregator. Obviously, the accounts want that aggregator. They don’t want to deal with hundreds of publishers individually, or even with just each of the Big Five. It would be a non-starter for a publisher supplying five or ten or even twenty percent of their books to say: “can we work out a way to do this directly?” So just about everybody has to accept the inefficiency.

But what about if it were a supplier that provided half the books? And what if that supplier offered, as an opening gambit, to share some of the margin that now goes to the middle player directly with the account? And what if that effectively became the account’s only way to get those books, because the powerful publisher was no longer willing to play ball with the high discounts and high returns that the current system entails?

Only Penguin Random House is in a position to take this approach. And it wouldn’t be an easy thing to do. They’d have to create a VMI system. They’d have to organize a detailing army quite different from the sales force(s) they have created and managed historically. They’d have to either gear themselves up to execute more smaller shipments or form alliances that would make that possible. But the payoffs would also be substantial. And PRH has a much bigger margin share to support their efforts than ReaderLink, or any other wholesaler or distributor, would have.

Sales would go up. Returns would go down. Margins would improve. Their competitors would be weakened. In fact, it is conceivable that, over time, a PRH direct-supply operation could morph into a ReaderLink service that was available to other publishers as well. (All big publishers, including PRH, already offer their core distribution services to competitors. This would be a variation on that theme.)

Perhaps Penguin Random House will never behave in a qualitatively different way than the other Big Five houses, exercising power that they uniquely have. They certainly haven’t so far. On the other hand, it was pointed out to me recently that the integration of what were the two biggest publishers among the Big Six when Random House and Penguin combined four years ago is, even today, not yet complete. Rationalization has occurred in the “back end”, with the consequent job losses which are part of the payoff for the owners in any big merger of this kind. But more consolidation is still in front of them, and perhaps the radical paradigm-shifting initiatives need to wait until that job is really done.

And perhaps Amazon, Barnes & Noble, and now ReaderLink are wary of poking the bear, and are less demanding that PRH honor their primacy with margin than they are of PRH’s competitors. In fact, the CEO of one of their Big Five competitors told me a year or two ago that he liked having a competitor of PRH’s size on the publisher side because this executive felt it kept the overall industry terms under control. The belief on this CEO’s part was that PRH’s size restrained the big accounts to the benefit of all the big players.

But unlike Amazon or Barnes & Noble, whose businesses can not be efficiently replaced by any direct effort, the supply of mass merchant accounts is something PRH could conceivably do better on their own. Whether the acquisition of Anderson by ReaderLink provides the catalyst to get them to try it is something it will probably take a couple of years to find out.

Although Ingram occupies a unique position in the global book supply chain and, indeed, might be the single most important player, they aren’t in the position of these other four to exercise power. In wholesaling, they have always had a powerful national competitor, Baker & Taylor, which is now even more financially stable having itself been acquired last week by Follett. Even in smaller-publisher distribution, where Ingram grew dramatically by acquiring Perseus, they will always have all the big publishers and a host of smaller distributors as alternatives for those considering their services. Indeed, Ingram could try to compete with ReaderLink for the mass merchant accounts, but they’d have to support the substantial systems and staff investments on a distribution margin, which is a much more challenging proposition than it would be for PRH with the publisher’s margin.


On Amazon stores and publishers accepting standardization; two unrelated commentaries

When the “Amazon-opening-400-stores” rumor landed a week ago, many people were gobsmacked. It took me a minute to get past that, which also required getting past my firm conviction when they opened the Seattle store last year that it was an information-gathering exercise, not the opening move of a bigger retail play.

But, when you think it through, it not only doesn’t seem crazy that Amazon would open stores, it seems like an obviously compelling move.

Other retailers that started strictly online have opened retail locations, most notably the eyeglasses shop Warby Parker. (This New Yorker story mentions that. It also has an interesting disclaimer at the end because “Amazon Studios is producing a New Yorker series in partnership with Condé Nast Entertainment”. Wow.)

“Omni-channel”, which is really a new-fangled fancy term for selling both online and through a brick store, is the buzzword du jour of retailing. Actually, the online piece of that is the harder part and Amazon already had that licked.

Barnes & Noble “beat” Borders largely because they had a network of distribution centers that made stocking their retail locations extremely efficient. Amazon’s network of distribution centers is complicated because it isn’t just books, but they have many times the number of points of inventory storage as B&N. In fact, they have many times the number of storage points as B&N and Ingram and Baker & Taylor combined!

Amazon has tons of information that nobody else does that would inform their stocking decisions if they harnessed it. They know where searches are coming from for particular book titles or for generic needs, both geographically and psychographically. And they probably can detect early lifts for particular books faster than anybody else, simply because they have more data.

It is possible that if B&N and the indies had responded differently to Amazon Publishing, agreeing to stock the books rather than boycotting them, this could have played out differently. (No stronger argument could be made for the efficacy of that strategy than this post arguing that stores should stock Amazon titles to punish them because the returns would make them unprofitable! You can’t beat logic like that.) If the stores had stocked their titles, Amazon might have chosen to use their distribution center advantage to start wholesaling, rather than to support their own retail locations (as they appear to be doing).

But the determination of the brick retailers to boycott Amazon was spelled out loudly and clearly. So opening Amazon retail locations — as it increasingly appears they have every intention to do — has two strategic payoffs for them. One is that it gives them access to at least some brick-and-mortar retail locations for their publishing output, which otherwise they can only sell online. And the other is that it capitalizes on their distribution centers, delivering additional sales and margin for investments already made.

In a recent post, I suggested one specific way Amazon could get very disruptive if they had more than a handful of stores. There’s another. They are a tech company that likes to have computers make decisions that in other companies and in other times have been made by humans. I suspect they’ll figure out pretty fast that they will want to have some sort of vendor-managed inventory system to streamline and optimize the stocking decisions for what will almost certainly be a growing network of retail locations. (The part of a trade book person’s DNA that is most out-of-step with the digital age is that we like to make decisions case-by-case, rather than living with decisions made by rules we create. That’s the key to the second half of this post.)

Sophisticated but automated stocking and restocking decisions are not part of the toolkit at B&N or of any other retailer or wholesaler we know. Could that be the next battleground that Amazon retail stores create? That would certainly be disruptive, but at least in this corner of the world it would not be a surprise.


One mantra of the book publishing world is “every book is different”. We sometimes refer to that fact as reflecting the “granularity” of the book business compared to other kinds of consumer goods businesses or other media. Even if you think in terms of categories, there are just more of them in publishing than there are for other products or media.

Perhaps, then, it isn’t surprising that publishers are often inclined to encourage that uniqueness beyond where it is required. And, frankly, it is only required for editorial development and for targeting the marketing. The objective at every place in the value chain in between should be to standardize and, as much as possible, to treat many different books the same. That’s not a creative imperative; it is a commercial imperative.

My father first experienced the tension that this insight can create at Doubleday in the 1950s when he persuaded the company to standardize the trim sizes of their books for maximum printing efficiency. That didn’t require radical changes. It simply meant that books would be an eighth- or quarter-inch longer or shorter, wider or narrower. These were differences that were really not perceptible to most people, yet it was a real internal corporate battle to wrest control from designers who believed “every book is different” and that this mystery (or cookbook) had to be published as a 6 by 9 inch book while that one had to be 6-1/2 inches by 9.

In fact, the trivial differences in trim size were not important at all to the books’ chances of success. There were other decisions — the specific paper or type face among them — that also had no discernible commercial impact on each individual book but were, nonetheless, intentionally made book-by-book as though they did. In many houses, and (admittedly I’m saying this without any supporting data) probably more in smaller houses than larger ones, they still are. And that’s true even though whether the paper is 55 pound or 60 pound or the type face is Times Roman or Baskerville can’t be shown to have any impact at all on a book’s sales.

Now the University of North Carolina Press has been funded by the Mellon Foundation to put Dad’s theory to use in the university press and academic publishing world. They’ve created a service offering through their Longleaf distribution platform that takes the design, pre-press, production, and distribution burden off the hands of university press and academic publishers so they can focus on what makes them distinctive: the books they choose to publish and the skill with which they edit them.

This fits an industry reality I identified a couple of years ago that I called “unbundling”.

On one hand, UNC Press Director John Sherer reports real success, expecting to grow that part of their business by 50 percent in the coming year. But he also reports resistance by some presses who believe that making these design and production decisions adds so significantly to the “quality” of their output that they’re comfortable losing money doing it.

My own hunch is that many directors just don’t have the heart (or courage) to get rid of staff that, with all the best intentions and capabilities but without the advantages of technology and scale, provide them with no better than average quality at a much higher cost than they need to spend. This was a battle for Leonard Shatzkin when he fought it at Doubleday in the early 1950s and apparently it is still being fought hard six decades later.


Transformation of companies and the book industry itself are not just 21st century phenomena

Company transformation is a major theme at this year’s Digital Book World conference. By “transformation” we mean substantial changes in a company’s business model or core competencies or revenue streams. We found eight worthy companies to speak on this subject. Six of them — Houghton Mifflin Harcourt, Ingram, Quarto, Rodale, Sourcebooks, and Wiley — are long-established players in the book business that have changed considerably in some fundamental ways compared to what they were and did ten years ago. Two of them — NetGalley and Diversion Books — started relatively recently to bring digital innovation to the publishing business and have moved considerably beyond their original goals and business models.

What got us started on this whole line of thinking was an article in the Nashville Tennessean last summer about Ingram. It documented what has been a pretty massive transformation over the past two decades from a company that was a traditional book wholesaler to one that has a big technology component providing a variety of services to the global publishing industry.

As Chairman and CEO John Ingram will discuss in detail with me on the stage at DBW, the changes we see today at Ingram really date from the creation of Lightning Print in 1997. The idea of “print on demand” — manufacturing a single copy of a book to order — became extraordinarily powerful when it was incorporated into the supply chain through the global supplier with the biggest network of bookstores and libraries. Ingram could put the book they manufactured this afternoon on an even footing with those titles for which they stocked inventory from publishers. At first this was just for paperbacks with pretty strict limitations on trim size and bulk. As time went by, Lightning improved the technology to deliver much higher quality, color, and hardcovers.

The ebook revolution dawned at about the same time as Lightning began. It didn’t take long for the repository of digital files Ingram held to become an even more valuable asset. It is now called CoreSource, and it drives both POD and ebook distribution.

But, in fact, Ingram had transformed, and transformed the industry, once before. That happened in the 1970s, right about the time I started working full-time in the trade book business. And it is a story that everybody trying to understand today’s transformation would appreciate and learn from.

I had forgotten until I searched that I had written about this before, nearly seven years ago when this blog was brand spanking new. Here’s an edited version of the story as I told it then.


Before the early 1970s, wholesalers to the trade were local and carried a relatively small number of titles. Their main job was to provide back-up stock of bestsellers very quickly. Most bookstores went directly to the publishers for just about everything else. Baker & Taylor was national, but focused on the library market. And Ingram (which was Tennessee Book Company until the Ingram family bought them) was a small and pretty insignificant player. Harry Hoffman was their president.

Most of those local wholesalers to the trade actually leaned on other business for most of their volume: school supply, library supply, or mass-market books and magazines. They looked to the trade book business for multiple copy sales of a handful of titles that were hot.

The wholesalers’ challenge was that they couldn’t carry everything, and for anything except the top titles, there was no assurance of any demand.

And that created the retailers’ challenge. Most of what they ordered from a wholesaler wouldn’t get delivered. The “fill rate” (percentage of what’s ordered that is delivered) was terrible. On average, it was well below 50%.

The flip side of this was bad for the wholesalers. Most of the orders they got from stores couldn’t be filled, but still required some level of processing and communication to tell their customers what they wouldn’t get. So, cumulatively, they spent a lot of money on the orders they couldn’t make a nickel on.

And here was everybody’s shared challenge: all of this took a lot of time and effort that was unproductive and didn’t get books back on the shelves.

One day in about 1972, a former colleague of Hoffman’s from his tenure at Bell & Howell stopped by to visit and showed the Ingram team a new gadget called a microfiche reader. The reader enabled one to see what was on a piece of film that was about 3 inches by 5 inches and was literally packed with information. What somebody saw in that meeting (and Michael Zibart, a longtime friend of ours who did the buying at Ingram then and is now owner and publisher of BookPage, thinks it was Hoffman himself) was that Ingram could put the inventory count for every book it stocked on a single microfiche. So if somehow the stores could have a reader, they could get the inventory of Ingram’s books mailed to them each week.

(Yes: mailed! Isn’t it amazing how klunky life was before email and the web?)

If stores could see what books were actually there, they’d stop ordering books Ingram didn’t have. And they’d know, with reasonable certainty, what they were going to get when they placed an order. And the very good news for Ingram was that they would no longer have to process orders they couldn’t fill.

The challenge for Ingram was to get the microfiche readers Bell & Howell made, which were not inexpensive, into the stores’ hands. They decided to do that by renting them, asking the stores to pay a monthly fee (memory says it was $10 a month) to have them. So they went to the ABA Convention (American Booksellers Association, which sold the convention to Reed Exhibitions in the 1990s and which Reed turned into BEA) in Los Angeles in 1973 to peddle the readers. They had no idea what reaction they’d get.

It turned out to be overwhelmingly positive. The stores, many of which didn’t yet know Ingram, were enthusiastic about the concept and willing to pay to rent the reader. Ingram was able to charge the publishers for the cost of creating the microfiche (I think that started at $1 per month per title listed). So they created self-liquidating efficiencies which immediately supercharged their fill rate (into the 90s), boosted their volume and customer base, and eliminated lots of waste: the money they spent processing orders they couldn’t fill. As a bonus, Ingram was able to put their unique title number, which they needed to fill an order, on the microfiche so the stores did the “coding” for them, writing those numbers on orders that they sent in by mail. (We didn’t even have faxes yet.) More costs eliminated.

Within a year or two, Ingram was the first really powerful national trade wholesaler. Baker & Taylor, national but much more library-focused, copied the microfiche innovation later in the 1970s. Stores were able to stock backlist much more efficiently because they could single-source multiple publishers and order with much greater frequency.

This was really a transformation story before we thought about companies changing in this way. But it wasn’t just a company that changed that time, it was the whole industry. And it probably was changed more by the microfiche and the growth of effective wholesaling than by any other single thing that happened after that until…Lightning Print.

Two worthy extensions of this piece. John Ingram did a nice little interview with Daniel Berkowitz at the Digital Book World blog.

And my good friend Joe Esposito published a piece about a year ago citing the Ingram microfiche innovation for the significant milestone that it was. Esposito made the further point that what Ingram did for the industry was subsequently what Jeff Bezos did with Amazon for the consumer. That is, of course, particularly ironic, since it was Ingram’s inventory and rapid fulfillment capabilities that Bezos used to get Amazon started.


Book publishing lives in an environment shaped by larger forces and always has

(Note to my readers. This longer-than-usual post is really two. The first half is a recital of what I believe is very relevant history. The second half is about how things are now. Although I am personally fascinated by the historical context, if you get bored with the history, the bolded text below marks the spot you can skip down to to get to “today”.)

Book publishing has always adapted to an environment shaped by larger forces. That hasn’t changed.

Andrew Carnegie provided a big lift early in the 20th century when he financed a lot of libraries, taking books and reading into every corner of the country. In the 1930s, publishers led by Putnam and Simon & Schuster made “returns” a part of the commercial equation between publishers and bookstores because the depression was making stores especially wary of taking on inventory.

After World War II, the mass-market paperback revolution was made possible by a network of magazine wholesalers (also called “IDs”, or “independent distributors”) who could push product out to hundreds of thousands of points of purchase.

In the 1960s, shopping center development boomed. The mall developers wanted “bankable” entities to sign up for their stores before the projects were built. Banks providing mortgage cash liked national brand names for that purpose better than unknown local entrepreneurs. That fact spawned the mall chains, Waldenbooks and B. Dalton, which each grew into the hundreds of stores by the 1970s. All those new stores opening created pipelines for publishers to fill that made the book business grow even faster.

Then in the late 1980s, Wall Street believed the destination superstore was a good bet and happily financed Borders (which bought Walden) and Barnes & Noble (which bought Dalton) to build out the 100,000+-title store model. This again created huge pipelines for publishers to fill and, unlike the situation when 25,000-title mall stores were proliferating, the orders to fill them went deep into publishers’ backlists.

All of this 20th century growth fit a similar model for publishers, leaning on booksellers to present their books to the public and to manage the inventory in an ever-expanding number of bookshops. So publishers continued to focus on business-to-business marketing, honing their expertise at positioning their titles for reviewers, bookstore buyers, and library collection developers but only occasionally addressing the public, or any segment of any book’s consumer audience, directly. And they continued to focus their sales efforts on persuading stores to make commitments to their books. The ability to get “buys” from the booksellers really drove marketing and revenue.

Then in 1995, Amazon arrived and changed the game in many ways. And we can see in retrospect that the birth of Amazon heralded an even bigger change in the commercial context for publishers. Amazon’s arrival began an era which is now in full flower, where the environment for book publishers is largely influenced by major tech companies for which publishing is a hardly-noticed activity even though their impact on the world of publishing is profound. Although there are certainly others who figure in, the environment today for marketing and delivering books is shaped by what Professor Scott Galloway of NYU Stern School of Business calls “The Four Horsemen”: Amazon, Apple, Facebook, and Google.

Amazon, like booksellers before them, handled the direct relationship with consumers and evolved, after an early period of depending on Ingram for their stock, to staging the inventory to serve them. It pretty quickly became apparent that they were much more disruptive than prior innovators in many ways. Among them:

Amazon operated in an environment without geographical constraints; their sales weren’t constrained by local boundaries like the physical bookstores. They could effectively provide service to customers from anywhere. So even in the beginning, when they were taking such small share away from each of the existing market players that they hardly noticed it, Amazon was building a substantial customer base for itself.

Pretty early in the game, Amazon persuaded Wall Street that it was “different” and didn’t ultimately have to make its fortune selling books. Books were just the key to the first step: customer acquisition. The profits would come from subsequent steps: selling those customers other things (and — the more sophisticated part — selling the infrastructure it was creating at scale). Once the investment community was on board to finance that strategy, Amazon was liberated to price-compete in a way that, it is clear in retrospect, no book-centric retailer could keep up with.

The number of shipping points for Amazon, which have recently proliferated and is now in the dozens at least, grew slowly, so Amazon was inherently more “efficient” with its purchases than bookstores could possibly be. Each book shipped to them had a much bigger sales base than it would in a single store and therefore also had a much lower chance of being returned. At the same time, as they took sales away from brick-and-mortar stores, returns from that side of the business tended to go up, at first because the publishers’ sales forecasting was unconsciously working with a diminishing base, and then later because moving to fewer titles in stock became part of the solution to reduced sales and returns were part of how they got there.

The book-buying public adjusted very quickly to Amazon. For several decades leading to the 1990s, publishers and bookstores had learned that a massive in-store selection was a powerful magnet to draw customers. The choice of books has always been so granular that it is virtually impossible for any retailer to stock everything a customer might want. Jeff Bezos knew and understood that, and he had the vision to understand how an online retailer could benefit from the impossible challenge a brick-and-mortar bookstore faced.

Amazon used a Baker & Taylor database that hadn’t been “cleaned”, so it had a lot of out-of-print books in it. Amazon turned that into a benefit for their customers, because it gave Amazon a platform to tell a searcher that the book they wanted was no longer available if that were the case. (If you just don’t find your book when you search, you would be inclined to look again elsewhere. But if you find it and are told it is out of print, you would perhaps look for a substitute.) Combining that with rigorous “promise dates” telling customers when their books would arrive progressively lured, and then satisfied, more and more book buyers. The less likely the buyers thought it would be that they’d find a book in a store, the more likely it would be they’d just order it from Amazon. In a story we’ve told on this blog before, we learned on a consulting assignment with Barnes & Noble in the first couple of years of this century how dramatically the buying habits of academics had shifted away from store-shopping to buying from Amazon.

By the end of the first decade of this century, the future had arrived with a vengeance. Amazon dominated the rapidly-growing ebook business, driving the publishers into an embrace with Apple (one “Horseman” come to save them from another) that brought them into conflict with the Department of Justice. And then Borders, one of the two dominant national bookstore chains and proprietors of more than four hundred 100,000-title stores nationwide, shut down, taking a big double-digit percentage of the nation’s bookstore shelf space with them.

The collapse of Borders had an impact on the publishers’ ecosystem comparable to what the effect will be on sea levels when the Greenland or West Antarctica ice sheets break off: a sudden surge of change reflecting a long-term trend. As Hemingway wrote about the way things often happen: “gradually, then suddenly”.

And this brings us to the world we live in today. Like a frog in gradually heated water, many of us have lived through the change so we may think we’re more adjusted to it than we actually are.

Publishers now live in a world where more than half the sales for most of them — the exceptions are those who are heavily into illustrated books and children’s books — occur online through varying combinations of print and ebooks. Their two biggest accounts — Amazon for online sales and Barnes & Noble for stores — each reign supreme for their channel of the business. (And although Amazon has opened a store and Barnes & Noble has an online sales capability, they are likely to remain the leading player where they are now and much less important in the other channel.) Because they’re so important, they can be increasingly aggressive in how much margin they insist on as discount from the publishers’ price and various merchandising fees.

When bookstores were the distribution path for books, they were also the primary avenue for “discovery”. That was what the big store was about. People could browse it and find things they had no idea existed that they wanted to buy. But, as we all know, “discovery” now is largely an online thing, driven by some magical combination of “search engine optimization”, social media promotion and word-of-mouth, and online retailer merchandising.

So the model that has served publishers for a century, putting out books through a network of stores that both draw in the public and contextually position the books for them (in topical “sections” and some featured placements like windows or front tables), has been seriously eroded. What has replaced big parts of it are online purchases of books “discovered” through a variety of mostly online channels. And that’s where the Four Horsemen become so prominent.

Amazon and Apple are, along with Barnes & Noble, where most of publishers’ sales will take place. Each retailer does its own merchandising, of course. All of them will undoubtedly be increasing the variety and sophistication of its offerings, but will also have different rules and algorithms influencing how they respond to descriptive copy and metadata triggers the publishers will be providing. Understanding how this all this works at Amazon and Apple as well as publishers always did with Barnes & Noble and other brick-and-mortar retailers is a clear agenda item for all publishers. And they get it.

What some are still learning is “the fallacy of last click attribution”. (This is one of the more important nuggets of knowledge I’ve picked up in the past couple of years from my partner, Peter McCarthy, as we’ve been building our Logical Marketing business.) In a nutshell, that means that where somebody buys something is not necessarily where they made the buying decision. If you’re an Amazon Prime subscriber getting free shipping on your books, you go to Amazon to buy regardless of where you learned about the book. And that’s why all four horsemen are so important.

Although Google is also a retailer, a much less potent one than Amazon or Apple, Google’s importance is that it dominates search. And despite the penetration of apps on both the iOS and Android platforms (more everybody needs to understand about Apple and Google), search is still the primary way almost everybody looks for things. Google still has in the neighborhood of 60 to 70 percent of search activity (even though Microsoft’s Bing now powers AOL and Yahoo search). Many of the sales transacted on Amazon and Apple are made because of search results delivered by Google. According to the latest SimilarWeb numbers, approximately 25% of Amazon’s traffic originates as a Google search. One quarter. And Amazon is one of Google’s very largest advertisers.

Google also has an enormous impact on an author’s ability to be part of the merchandising process. Google Plus hasn’t turned out to be much of a social interaction platform, but an author’s profile there can have a big impact on how the author and his/her books rank for search. This has long been true but is not, even now, universally appreciated.

In short, Google Plus author pages are nearly as important as Amazon author pages, a fact totally independent of the traffic either of them gets.

Facebook is the only one of the Four Horsemen that doesn’t (for now, anyway) actually function as a retailer at all, but Facebook is increasingly important to book marketing. Something north of two billion people use Facebook, a billion of them every day. Nineteen percent of the world is on Facebook; forty percent of Internet users. More and more time is spent there by more and more people.

As anybody who uses it knows, Facebook makes it incredibly simple to share content or links. More and more authors and publishers are learning how to use Facebook as a marketing and advertising tool. Everybody’s there. Rule #1 of marketing: fish where the fish are.

So the transactions take place primarily at Amazon, often at Barnes & Noble (still) and Apple, and occasionally at Google. But the drivers to the transactions are Google and Facebook. (And others, of course, but none approaching the importance of those two.) How successfully publishers will sell books in the future will largely depend on how well they master the opportunities presented by Amazon, Apple, Facebook, and Google.

One of the big new opportunities, beyond the scope of this piece to cover in detail but very much part of the new operating environment, is “nearly effortless global” sales. All of the Four Horsemen reach every corner of the planet. The structural barrier there is that the responsible sales operators haven’t historically had to think about many different global sales opportunities.

Another is to make better synergistic use of author relationships. What authors do on Facebook and Google Plus (and a host of other social networks) needs to become part of the publisher’s overall picture of the book and its marketing. And the structural barrier there is that the editor is too often forced to be the conduit for this coordination, a task for which they are neither prepared nor supported.

Operating through and with these behemoth companies is a big challenge for our industry. David Young, who just retired from Hachette UK, shared an observation with me when he was CEO of Hachette US a few years ago. The CEO of a big publisher in the past could always get the CEO of his or her biggest accounts on the phone if necessary. That was no longer true eight years or so ago when he made the observation, talking about Amazon. (And talking about Amazon a few years before Hachette and Amazon had a very public dispute that hurt Hachette sales very badly.)

There are two legacy accounts for publishers that remain critical to their future: Barnes & Noble, the industry’s one omni-channel wholesaler, and Ingram, which began as a book wholesaler but which has morphed into a service provider helping publishers with all sorts of modern challenges, including global distribution, print-on-demand, and now, with the acquisition of, the ability to promote and sell through new technology Ingram and offer. Ingram, unlike any of the other players, is helping smaller publishers with tools to enable them to punch above their weight. That is likely to be a growth proposition in the years to come.

But B&N and Ingram, just like all the publishers, will have to understand the strategies and activities of the four big companies driving change and creating a new ecosystem for the book business. They’ll also have to do it without a direct line to their CEOs. But, then, not very many publishers were able to get Andrew Carnegie on the phone 100 years ago either.

Digital Book World 2016 has a lot of programming addressing the issues raised in this piece. Professor Scott Galloway will talk about the Four Horsemen. Professor Jon Taplin of USC will analyze how revenue has moved from content creators to tech companies and suggest some ways some if it might be clawed back. Rand Fishkin, founder, former CEO (and now Wizard) of Moz and perhaps the most knowledgeable person in the world about search, will offer the latest insights into how search is being affected by “local” and “mobile” and then have a session to take questions.

Virginia Heffernan, author of Magic & Loss will discuss the cultural and economic impacts of the digital age for content creators.  Antitrust attorney Jonathan Kanter  will look at the relationships among book publishers, major technology players, and consumers from a competitive and regulatory perspective

Roy Kaufman of Copyright Clearance Center will moderate a panel talking about changes in copyright law, something also driven by big players affecting the publishers’ commercial environment. And we have a slew of presentations about companies “transforming” — changing how they do business in fundamental ways while maintaining the revenues that sustain them. That will include a presentation from Ingram Chairman and CEO John Ingram. And Barnes & Noble’s new Chief Digital Officer, Fred Argir, will talk about how they are building out an “omni-channel” strategy and what they can offer publishers in the way of improved digital discovery.

And there will be panel discussions of both the issues we identified as publishing opportunities: global sales and marketing collaboration with authors.

DBW 2016 takes place in New York March 7-9, 2016.


It is being proven that smaller bookstores can work commercially

Sometimes it takes a decade or more for an insight to be validated, but it is always nice when it happens.

Around the turn of the century, I was developing a business called “Supply Chain Tracker”, which had a nice client base for a few years. What we did was take the data feeds — Excel spreadsheets — provided by publishers’ major accounts and find the nuggets of insight within them that enabled better inventory decisions.

This followed the logic of one of Shatzkin’s Laws, which in this case is “every spreadsheet is one calculation short of useful”. We added some calculations to make meaningful metrics out of raw data. For B&N’s spreadsheets reporting inventory and sales activity to publishers, two of these were calculating the “percentage of store inventory sold” from the “on hand” and “sales this week” columns and “the percentage of total stock in the warehouse” derived from “on-hand in the stores” and “on-hand in the warehouse”.

My first client for this work was Sterling in the final year that they were independently owned before they were bought by B&N, which still owns them. When we showed our first prototype of a Supply Chain Tracker report to Sterling, we sorted by “the percentage of total stock in the warehouse” and two books popped to the top: 5000 copies with 100 percent in the warehouse! When Sterling’s then-Sales VP (later CEO) Charles Nurnberg saw that he said, “those books have been there since October!” This analysis was taking place the following February.

It turns out that B&N at the time had no systematic check of this metric in their workflow. If a B&N buyer bought five thousand copies and didn’t order a “store distribution”, the books would go into the warehouse and just sit there. It was a hole in their system. And since publishers tended to eyeball the spreadsheets in order of “sales”, looking for books that needed to be replenished, they just never caught this.

When Sterling showed the problem to the responsible execs at B&N, it bolstered the view of one of them that having the publishers intelligently reviewing inventory was useful support for the chain’s buying activity. They became supporters of our Supply Chain Tracker reporting (which we then extended to other accounts: Borders, Books-A-Million, Amazon, Ingram, and Baker & Taylor). But Barnes & Noble was everybody’s biggest account at the time and they offered the most robust reporting, so they were the primary focus of our work.

Let’s recall that the early years of this century were still the years of superstore expansion. B&N and Borders were proudly featuring stores that had 120,000 titles or more. It was precisely because they stocked so many titles and that the great majority of them turned very slowly that they wanted the additional publisher help in inventory tracking, particularly further down the sales ranks. And no publishers seemed more logical candidates for that help than university presses. B&N wanted to stock them more heavily, but their books were predominantly in the slow-turning majority. Distinguishing the books that would sell a copy or two in a store versus the ones that wouldn’t demanded the deep title knowledge of the publisher combined with the insight of well-structured reporting. Our work seemed to fit, so B&N subsidized our relatively expensive engagements providing our reports and tutorials on how to use them to university presses.

What we found as we started analyzing, though, was disappointing and initially surprising to all of us. But, as we thought about it, it was intuitively logical.

The university press titles had effectively stopped selling, even in B&N stores that were near university campuses. Why? Those sales had all moved to Amazon, which, at the time, was barely more than five years old. This first struck us all as disappointing and surprising. But, then, think about it…

The university professor would hear about a book. S/he’d go down to the local bookshop — could be a B&N or another store, didn’t matter — and look for the book. It would almost always not be there. So s/he’d “special order” it and wait for it. It didn’t take long for this to become an expectation, so ordering online became a very sensible default behavior. By 2002 and 2003, when we were doing this work, the battle to sell the obscure book to an audience that knew it was there and wanted it through a brick-and-mortar store was already lost. When you thought about this, it was intuitive, even though none of us anticipated it when we started doing the work.

Cambridge University Press at the time had a sales representative (since deceased) named Steve Clark. He was one of my most engaged B&N-subsidized clients. As we were doing this work and analysis, Clark told me that Amazon was already a bigger account for CUP than all other US retail outlets combined! That was a “wow”. But it underscored the degree to which Amazon had captured market share from the stores on hard-to-find books.

B&N still operated smaller stores that had been in the B. Dalton chain and Borders had a similar chain called Waldenbooks. While B&N and Borders were building out the 100,000-plus title stores, their mostly-mall chains were 20,000 and 30,000 title stores. They were in the process of shutting them down as leases expired.

With full knowledge of the strategy that governed their activity in those days, I said to my principal contact at B&N, “you guys should be figuring out how to use your infrastructure to make the twenty-thousand title store work”. He said to me, “Mike, we’re thinking about the million title store!” In other words, there was no appetite to take on board what we had all just learned to make a big change to the overall strategy. They had fully absorbed and couldn’t rapidly unlearn the lesson first discovered by my father, Leonard Shatzkin, when he was running Brentano’s in the 1960s: a big selection of books is a huge magnet for customers.

Unfortunately, Amazon had already changed that reality in a few short years after their inception. The huge selection was not as powerful a magnet as the online marketplace when the customer knew exactly what they wanted, particularly if it wasn’t a bestseller.

Now, flash forward to the present day. I’ve been fishing for lessons from retailers around the world that might constitute useful insight for the Digital Book World audience. My friend Lorraine Shanley of Market Partners suggested I talk to Anna Borne Minberger, the CEO of the Pocket Shop chain of stores, owned by the Swedish publisher, Bonniers. I got to meet Minberger for a conversation at the Frankfurt Book Fair in the last fortnight.

And, lo and behold, Pocket Shop has taken the suggestion I made to Barnes & Noble well over a decade ago and made it work at an extreme I didn’t imagine. Their tiny bookstores stock only about TWO thousand titles, but they are a thriving chain in Sweden and Finland now expanding into Germany. Their formula is a very small title selection placed in very-high-traffic locations (of particular interest here in New York City where both our main railroad stations are losing somewhat larger bookstores) with highly knowledgeable and helpful staff. I didn’t get into the details of buying, inventory management, and centralized infrastructure support in our Frankfurt conversation.

But, near as I can tell, Barnes & Noble still needs a solution to grow their book business; the strategy today only seems to be about how to profitably manage shrinking it. Particularly if it continues to work in Germany, a market (unlike Sweden and Finland) where online buying is strong and Amazon is a real presence in the market, one would think that the Pocket Shop formula would be even more effective if supported by the B&N infrastructure and branding in the United States. Of course, making a strategic shift of this nature is probably a heavier lift for B&N now than it would have been when I first suggested it many years ago.

But I don’t discern any other strategy that leads to growth in what B&N is doing now. If they don’t try copying Pocket Shops strategy in the US, maybe somebody else will. One could execute on this leaning on Ingram’s infrastructure rather than creating one’s own supply chain. Who knows? Maybe even Pocket Shops themselves would like to give it a try.


Seven key insights about VMI for books and why it is becoming a current concern

Vendor-managed inventory (VMI) is a supply paradigm for retailers by which the distributor makes the individual stocking decisions rather than having them determined by “orders” from an account. The most significant application of it for books was in the mass-market paperback business in its early days, when most of the books went through the magazine wholesalers to newsstands, drug stores, and other merchants that sold magazines. The way it worked, originally, was that mass-market publishers “allocated” copies to each of several hundred “independent distributors” (also known as I.D. wholesalers), who in turn allocated them to the accounts.

Nobody thought of this as “vendor-managed inventory”. It was actually described as “forced distribution”. And since there was no ongoing restocking component built into the thinking, that was the right way to frame it.

The net result was that copies of a title could appear in tens of thousands of individual locations without a publisher needing to show up at, or even ship to, each and every one.

To make this system functional at the beginning, the books, like magazines, had a predictable monthly cycle through the system. The copies that didn’t sell in their allotted time were destroyed, with covers returned to the publisher for credit.

Over time, the system became inefficient (the details of which are a story for another day, but the long story short is that publishers couldn’t resist the temptation to overload the system with more titles and copies than it could handle) and mass-market publishing evolved into something quite different which today, aside from mostly sticking to standard rack-sized books, works nothing like it did at the beginning.

My father, Leonard Shatzkin, introduced a much more sophisticated version of VMI for bookstores at Doubleday in 1957 called the Doubleday Merchandising Plan. In the Doubleday version, reps left the store with a count of the books on-hand rather than a purchase order. The store had agreed in advance to let Doubleday use that inventory count to calculate sales and determine what should then be shipped in. In 18 months, there were 800 stores on the Plan, Doubleday’s backlist sales had quadrupled and the cost of sales had quartered. VMI was much more efficient and productive — for Doubleday and for the stores — than the “normal” way of stocking was. That “normal” way — the store issues orders and the publisher then ships them — was described as “distribution by negotiation” by my father in his seminal book, “In Cold Type”, and it is still the way most books find their way to most retail shelves.

After my Dad left Doubleday in 1960, successor sales executives — who, frankly, didn’t really understand the power and value of what Dad had left them — allowed the system to atrophy. This started in a time-honored way, with reps appealing that some stores in their territory would rather just write their own backlist orders. Management conferred undue cred on the rep who managed the account and allowed exceptions. The exceptions, over time, became more prevalent than the real VMI and within a decade or so the enormous advantage of having hundreds of stores so efficiently stocked with backlist was gone.

And so, for the most part, VMI was gone from the book business by the mid-1970s. And, since then, there have been substantial improvements in the supply chain. PCs in stores that can manage vast amounts of data; powerful service offerings from the wholesalers (primarily Ingram and Baker & Taylor, but others too); information through services like Above the Treeline; and consolidation of the trade business at both ends so that the lion’s share of a store’s supply comes from a handful of major publishers and distributors (compared to my Dad’s day) and lots of the books go to a relatively smaller number of accounts have all combined to make the challenge of efficient inventory management for books at retail at least appear not to need the advantages of VMI the way it did 60 years ago.

And since so many bookstores not only really like to make the book-by-book stocking decisions, or at least to control them through the systems they have invested in and applying the title-specific knowledge they work hard to develop, there has been little motivation for publishers or wholesalers to invest in developing the capability to execute VMI.

Until recently. Now two factors are changing that.

One is that non-bookstore distribution of books is growing. And non-bookstores don’t have the same investments in book-specific inventory management and knowledge, let alone the emotional investments that make them want to decide what the books are, that bookstores do. Sometimes they just simply can’t do it: they don’t have the bandwidth or expertise to buy books.

And the other is that both of the two largest book chains, Barnes & Noble and Books-a-Million, are seeing virtue in transferring some of the stocking decisions to suppliers. B&N, at least, has been actively encouraging publishers to think about VMI for several years. These discussions have reportedly revolved around a concept similar to one the late Borders chain was trying a decade or more ago, finding “category captains” that know a subject well enough to relieve the chain of the need for broad knowledge of all the books that fall under that rubric.

This is compelling. Finding that you are managing business that could be made more efficient with a system to help you while at the same time some of your biggest accounts are asking for services that could benefit from the same automation are far more persuasive goads to pursue an idea than the more abstract notion that you could create a beneficial paradigm shift.

As a result, many publishing sales departments today are beginning to grapple with defining VMI, thinking about how to apply it, and confronting the questions around how it affects staffing, sales call patterns, and commercial terms. This interest is likely to grow. A well-designed VMI system for books (and buying one off-the-shelf that was not specifically designed for books is not a viable solution) will have applications and create opportunities all over the world. Since delivering books globally is an increasingly prevalent framework for business thinking, the case to invest in this capability gets easier to make in many places with each passing day.

VMI is a big subject and there’s a lot to know and think through about it. I’ve had the unusual — probably unique — opportunity to contemplate it with all its nuances for 50 years, thanks to my Dad’s visionary insight into the topic and a father-son relationship that included a lot of shop talk from my very early years. So here’s my starter list of conceptual points that I hope would be helpful to any publisher or retailer thinking about an approach to VMI.

1. Efficient and commercially viable VMI requires managing with rules, not with cases. Some of the current candidates to develop a VMI system have been drawn into it servicing planograms or spinner racks in non-book retailers. These restocking challenges are simpler than stocking a store because the title range is usually predetermined and confined and the restocking quantity is usually just one-for-one replenishment. We have found that even in those simple cases, the temptation to make individual decisions — swapping out titles or increasing or decreasing quantities in certain stores based on rates of movement — is hard to resist and rapidly adds complications that can rapidly overwhelm manual efforts to manage it.

2. VMI is based on data-informed shipments and returns. It must include returns, markdowns, or disposals to clear inventory. Putting books in quickly and efficiently to replace sold books is, indeed, the crux of VMI. But that alone is “necessary but not sufficient”. Most titles do not sell a single copy in most stores to which they are introduced. (This fact will surprise many people, but it is mathematically unavoidable and confirmed through data I have gotten from friends with retail data to query.) And many books will sell for a while and then stop, leaving copies behind. Any inventory management depending on VMI still requires periodic purging of excess inventory. That is, the publisher or distributor determining replenishment must also, from time to time, identify and deal with excess stock.

3. VMI sensibly combines with consignment and vendor-paid freight. The convention that books are invoiced to the account when they are shipped and that the store pays the shipping cost of returns (and frequently on incoming shipments as well) makes sense when the store holds the order book and decides what titles and quantities are coming in. But if the store isn’t deciding the titles and quantities, it obviously shouldn’t be held accountable for freight costs on returns; that would be license for the publisher or distributor to take unwise risks. The same is really true for the carrying cost of the inventory between receipt and sale. If the store’s deciding, it isn’t crazy for that to be their lookout. But if the publisher or distributor is deciding, then the inventory risk should be transferred to them. The simplest way to do that is for the commercial arrangement to shift so that the publisher offers consignment and freight paid both ways. The store should pay promptly — probably weekly — when the books are sold. (Publishers: before you get antsy about what all this means to your margins, read the post to the end.)

Aside from being fairer, commercially more logical, and an attractive proposition that should entice the store rather than a risky one that will discourage participation, this arrangement sets up a much more sensible framework for other discussions that need to take place. With publisher prices marked on all the books, it makes it clear to the retailer that s/he has a clear margin on every sale for the store to capture (or to offer as discounts to customers). And because the publisher is clearly taking all the inventory risk, it also makes it clear that the account must take responsibility for inventory “shrink” (books that disappear from the shelves without going through the cash register.)

Obviously, shrink is entirely the retailer’s problem in a sale-and-return arrangement; whatever they can’t return they will have paid for. But it is also obvious that retailers in consignment arrangements try to elide that responsibility. Publishers can’t allow a situation where the retailer has no incentive to make sure every book leaving the store goes through the sales scan first.

4. Frequent replenishment is a critical component of successful VMI. No system can avoid the reality that predicting book sales on a per-title-per-outlet basis is impossible to do with a high degree of accuracy. The best antidote to this challenge is to ship frequently, which allows lower quantities without lost sales because new copies replace sold copies with little delay. The vendor-paid freight is a real restraint because freight costs go down as shipments rise, but it should be the only limitation on shipment frequency, assuming the sales information is reported electronically on a daily basis as it should be. The publisher or distributor should always be itching to ship as frequently as an order large enough to provide tolerable picking and freight costs can be assembled. The retailer needs to be encouraged, or helped, to enable restocking quickly and as frequently as cost-efficient shipments will allow.

5. If a store has no costs of inventory — either investment or freight — its only cost is the real estate the goods require. GMROII — gross margin return on inventory investment — is the best measurement of profitability for a retailer. With VMI, vendor-paid freight, and consignment, it is infinity. Therefore, profitable margins can be achieved with considerably less than the 40 to 50 percent discounts that have prevailed historically. How that will play out in negotiations is a case-by-case problem, but publishers should really understand GMROII and its implications for retail profitability so they fully comprehend what enormous financial advantages this new way of framing the commercial relationship give the retailer.

(The shift is not without its challenges for publishers to manage but what at first appears to be the biggest one — the delay in “recognizing” sales for the balance sheet — is actually much smaller than it might first appear. And that’s also a subject for another day.)

6. Actually, the store also saves the cost of buying, which is very expensive for books. The most important advantage VMI gives a publisher is removing the need for a buyer to get their books onto somebody’s shelves. The publisher with VMI overcomes what has been the insuperable barrier blocking them from many retail establishments: the store can’t bear the expense of the expertise and knowledge required to do the buying. It is harder to sell that advantage to existing book retailers who have invested in systems to enable buyers, even if some buyer time can be saved through the publisher’s or distributor’s efforts and expertise. But a non-book retailer looking for complementary merchandise that might also be a traffic builder will appreciate largely cost-free inventory that adds margin and will see profitability at margins considerably lower than the discounts publishers must provide today.

7. Within reasonable limits, the publisher or distributor should be happy to honor input from the retailer about books they want to carry. It is important to remember that most titles shipped to most stores don’t actually sell one single unit. Giving a store a title they’re requesting should have odds good enough to be worth the risk (although that will be proven true or not for each outlet by data over time). Taking the huge number of necessary decisions off a store’s hands is useful for everybody; it shouldn’t suggest their input is not relevant. Indeed, getting information from stores about price or topical promotions they are running, on books or other merchandise, and incorporating that into the rules around stocking books, will help any book supplier provide a better and more profitable service to its accounts. After all, having a store say “I’d like to sell this title for 20 percent off next week in a major promotion, would you mind sending me more copies?” opens up a conversation every publisher is happy to have.

Of course, in a variety of consulting assignments, we are working on this, including system design. It is staggering to contemplate how much more sophistication it is possible to build into the systems today than it was a decade-and-a-half ago when we last immersed ourselves in this. In the short run, a VMI-management system will provide a competitive edge, primarily because it will open up the opportunity to deliver to retail shelves that will simply not be accessible without it. That will lead to it becoming a requirement. As I’ve said here before, a prediction like that is not worth much without being attached to a time scale. I think we’ll see this cycle play out over the next ten years. That is: by 2025, just about all book distribution to retailers will be through a VMI system.


Print book retailing economics and ebook retailing economics have almost nothing in common

There has been a lot of conversation lately about the differences between wholesale pricing and agency pricing for ebooks and about what constitutes a “fair” division of revenue between publishers and retailers. Since the economics of bookstores have been generally misunderstood for years, it is not surprising that the understanding of what changes make sense as we switch to digital have also been misunderstood. A better grounding in the print book economic realities might enable a more informed discussion of what makes sense for digital.

Here are a couple of points about book economics that I learned at my Daddy’s knee.

1. The investment in inventory is the single biggest capital requirement for a bookstore.

2. Given that the ability to invest in inventory is limited, the speed at which inventory “turns” (a measurement of how long a retailer has to hold stock before it sells) is a much more powerful determinant of a store’s total gross margin, and therefore its profit, than the margin it earns on each sale (the difference between what it pays for the inventory and what it is sold for).

In simple shorthand, that means that a retail store selling books can improve its profit more easily by more closely matching what it buys to what it sells than it can by squeezing more margin out of its suppliers. It also means that a publisher can do more for a store’s profitability by shipping quickly and allowing smaller orders at workable discounts (which make it easier to match supply to demand) and offering delayed billing than it can by offering extra points of discount (which is what added margin is called in the book business). The additional benefit of employing this understanding is that margin division is a zero-sum game, but increased inventory efficiency is actually synergistic: both the publisher and the retailer benefit from it.

This reality about bookstore economics explains the value to the supply chain of wholesalers like Ingram and Baker & Taylor. By offering the ability to combine orders across publishers and giving rapid, often next-day, delivery, the wholesalers enable stores to gain much more inventory efficiency at a relatively trivial reduction in margin. (Where the publishers’ “deal” is sometimes better than the wholesalers’ in a meaningful way is that publishers will often allow a longer period before demanding payment. Inventory “investment” only really begins when the books the store received are paid for.)

So, in fact, there is very little similarity between the economics of retailing print and retailing ebooks. The tech infrastructure for selling is not a trivial investment, and DRM — including customer service — is a significant expense that ebook retailers deal with that bookstores do not. The print retailer has to build a customer-friendly location and invest in (presumably knowledgeable) clerks. How those costs of doing business compare is a complicated question that changes over time as the tech gets cheaper and the cost of physical locations — driven by ever-higher real estate values in the attractive neighborhoods where bookstores tend to thrive — goes up.

But the things that change aren’t nearly as important as the things that don’t.

The stock turn of an ebook retailer is infinity. There is zero inventory investment.

Publishers first had to deal with the question of what the bookstore’s margin should be on ebooks back in the late 1990s when Palm Digital and Microsoft created the first reflowable ebook platforms. Prior to that we had PDFs, which delivered — in the current jargon — “fixed page layout” ebooks which didn’t adjust the number of words per screen to the screen size. At that time, the ebook retailers were inclined to sell at publishers’ “list prices” and publishers tended to price ebooks at about the same level as print.

But nobody paid a lot of attention because the sales and revenue were de minimus. Since Palm had the most hand-held digital assistants (Palm Pilots) in circulation back at the turn of the century and because (as we have clearly learned since) portability is one of the big drivers of ereading, Palm’s ebooks were the best-selling format. But Palm decided not to enable widespread distribution of their ebook format; they sold the ebooks themselves through a controlled vendor (originally called Peanut Press and then Palm Digital).

In fact, the mobi format that Kindle uses today was developed at the time as a bridging format, able to be read on both Microsoft and Palm devices. This was before the creation of the epub format used by everybody except Kindle today. When Amazon bought Mobi, it was apparently to prevent any other retailer from building a real ebook business selling to what was then the “entire” ebook market. B&N’s one-time exit from ebooks was because they could sell only to Microsoft and not to Palm devices, which meant they had the smaller piece of what was a very small market. Amazon apparently figured then that they’d enter the market when they were ready, but they wanted to prevent B&N from building a foothold in it before then.

I’d argue that the biggest mistake B&N made in the history of ebook evolution was not buying Mobi before Amazon did.

So it became “established” that ebooks would be sold on a similar basis to print books with discounts of 40 percent or 50 percent off publisher-set retail. It should have been no surprise to anybody that once “real” retailers — not software companies like Microsoft and Palm — took the reins, they’d give away a lot of that margin to go after market share. That’s what real retailers do; it’s in their DNA.

In fact, the first wave of discounting of print in the 1980s by the Crown Bookstores chain followed very quickly behind increases in publishers’ discounts to stores from the low 40s to 46 percent and up. Most people never noticed that; others think there’s no connection. It always seemed to me that the increased publisher discounts and the discounting to consumers were linked.

In the early days of ebooks, the volumes were so low and the tech was still under development, so the significant margin the publishers offered — and the retailers employed — might have been necessary to have any ebook retailing at all. As time passes, the fixed retailing costs get lower and the customer service costs also tend to get lower.

Once a real retailer, Amazon, got into the ebook business, deep discounts off publisher prices had to follow, and they did. The move to agency pricing had purposes beyond the principal one, which was to remove pricing as a weapon from the retail competition arsenal. It also put publishers on a path to set realistic retail prices for consumers and to reduce the notional share given to the sales intermediary from around 50 percent to 30 percent.

There’s reason to believe that even 30 percent is too high, given the plunging cost structure for retail and the economic reality of infinite turn on inventory investment. A senior Random House executive told me during the period they were not in agency (the first year it existed) that part of the reason they stayed out is that the 30 percent figure Apple wanted and the other publishers agreed to seemed “too high”. As it turned out, Random House came in a year later and accepted the 30 percent. They said at the time it was because indie bookstores were attracted to ebook retailing by the assured 30 percent margin and fixed retail prices, and Random House always wants to support independent retailers.

It was always curious to me that the preference of all the other retailers except those who can use the book business as a loss leader — Amazon, for sure, and perhaps Google —  for publisher-set retail prices never made its way into the discussion of the publisher motivation at the time, nor to Judge Cote’s reasoning, nor to the arguments which have taken place about it since.

Ebook pricing today is very confused. Apparently, many of the retailers will accept wholesale terms at a lot less than 50 percent, although this is not widely known and, indeed, isn’t even really confirmable. Discounts of print to bookstores were published, standard terms. That’s not the case with ebooks (because they’re not really sales, they’re licenses, no matter what anybody says, and they are individually negotiated contracts, the terms of which are kept private). Nobody outside Amazon really knows what margin Amazon actually takes from ebook sales; it is certainly true that most of the ebooks are discounted from whatever prices publishers “suggest”. (And sometimes those publisher-set prices may be inflated, particularly if the publisher is selling at a bookstore-like 50 percent discount.) Perhaps they only really take the 30 percent that they get from agency publishers and that they take from individual authors in KDP and that they have said in their arguments with Hachette is the “right” share for a retailer.

We actually still don’t know what the “right” or “fair” margin is for retailers of ebooks. Random House had some idea of that in 2010 when they were holding out and they seemed to think “less than 30 percent”. Comparing ebook retailing economics to print book retailing economics only tells us that physical retailers of print need a lot more to have a viable business. Dad also taught me is that the reason publishers give stores a discount off the publishers’ retail price — which should be the price a publisher would sell the book at if a member of the public came directly to them — is to give stores the margin they need to operate. Because publishers want there to be stores. First purposes may have been forgotten in course of the digital transition.

There is programming relevant to this post at Digital Book World 2015 in addition to the main-stage appearance of Amazon’s Russ Grandinetti main-with Michael Cader and me. We have a great panel discussion on “price promotion” with Josh Schanker of BookBub, Rachel Chou of Open Road, and Matt Cavner of Vook. And “Blue Sky in the Ebook World” where a panel of visionaries will talk about what is over the horizon for ebook retailing, rethinking simple ebooks, making complex ebooks, and creating ebooks with soundtracks. Jonathan Nowell of Nielsen Book’s talk about how the profile of what sells in print has changed will enlighten around this topic as well.


It is hard for publishers to apply even Harvard B School advice in their struggle with Amazon

Harvard Business Review published an article recently by Benjamin Edelman called “Mastering the Intermediaries” which gives advice to businesses trying to avoid some of the consequences of audience aggregation and control by an intermediary. The article was aimed at restaurants who don’t want their fate controlled by Open Table or travel companies who don’t want to be beholden to Expedia. The advice offered is, of course, scholarly and thoughtful. It seemed worth examining whether it might have any value to publishers suffering the growing consequences of so much of their customer base coming to them through a single online retailer.

The author presents four strategies to help businesses reduce their dependence on powerful platforms.

The first suggestion: exploit the platform’s need to be comprehensive.

The author cites the fact that American Airlines’ strong coverage of key routes made its presence on the travel website Kayak indispensable to Kayak’s value proposition. As a result, AA negotiated a better deal than Kayak offered others or than others could get.

Despite some suggestions in the late 1990s that publishers set up their own Amazon (which they subsequently half-heartedly tried to do with no success) and a couple of moves to cut Amazon off by minor publishers that were minimally dependent on trade sales, this tactic has never really been possible for publishers on the print side. Amazon began life by acquiring all its product from wholesalers — primarily Ingram and Baker & Taylor — before they switched some and ultimately most of its sourcing to publishers to get better margin. But the publishers can’t cut off the wholesalers without seriously damaging their business and their relationships with other accounts, and the wholesalers won’t cut off Amazon. So for printed books, still extremely important and until just a couple of years ago the dominant format, this strategy is not worth much to publishers.

However, the strategy was and is employable for ebooks, which are sold via contractual sufferance from agency publishers, even if the sourcing is (sometimes, not typically by Amazon) through an aggregator. That was the implied threat when Macmillan CEO John Sargent went to Seattle in the now-famous episode in 2010 to tell them that ebooks would only be available on agency terms. Amazon briefly expressed its displeasure by pulling the buy buttons off of Macmillan’s print books. (Publishers can’t cut them off from print availability, but they can cut publishers off from print sales!) In the meantime, Amazon’s share of the big publishers’ ebook sales has settled somewhat north of 60 percent, and those Kindle customers are very hard to access except through Amazon. This is considerably more share than Kayak had when American Airlines threatened their boycott.

In fact, it is likely that Amazon could live without any of the Big Five’s books for a period of time, except for Penguin Random House, which is about the size of the other four big publishers combined. The chances are that PRH’s size will prevent Amazon from treating them the way they are now treating Hachette. And the massive share that Amazon has of both print and ebook sales makes it extremely difficult for Hachette, or any other big house except PRH and possibly HarperCollins, to sustain an ebook boycott (with consequent print book sales reductions) for any significant length of time. In other words, for publishers dealing with Amazon, this horse has left the barn.

Where it has not yet left the barn is with the ebook subscription services, and for them many publishers actually appear to be following the strategy being suggested here. Only two of the big houses have put titles into Scribd and Oyster, and it appears that they got extremely favorable sales and payment terms in order to do so. Indeed, these fledgling subscription offerings must have the big houses’ branded books to have a compelling consumer proposition.

The second suggestion is to identify and discredit discrimination.

The HBS piece cites the complaints that eBay was giving search prominence to suppliers who advertised on the site forcing a reversal of the policy.

Although the search algorithms on powerful platforms are ostensibly geared only to give the customer what they’re most likely to want, it is probably generally understood that these results are jiggered to favor the platform’s interest. It is not surprising that Google has underwritten White Papers from UCLA professor Eugene Volokh and from Supreme Court nominee Robert Bork defending that conduct. Volokh argues that the first amendment prevents the government from interfering with search results and Bork says nobody is harmed if Google favors its own interests.

Could we apply that same logic to Amazon? How about this scenario?

Amazon is well on its way if not already past the point where they sell more than half of the books Americans buy (combining print and digital). Book consumers are highly influenced by the suggestions made and choices surfaced by their bookseller, whether physical or virtual. That is: the process of buying books is inextricably linked to the process of discovering books. So Amazon is getting a stranglehold on recommendations which for many consumers also means a stranglehold on marketing and promotion.

The “damage” to society that results from results being gamed in fiction is probably minimal, and restricted to Amazon promoting either its own published titles, its favorite self-published authors, and books from other publishers that have paid to play. But, with non-fiction, the consequences could be much more severe and of real public interest.

Imagine a persuasive book arguing that the government should sharply increase the minimum wage and let’s also imagine that Amazon corporately doesn’t like that idea. Is it really okay if they suppress the awareness of that book from half or more of the book-buying public?

This is the kind of an argument that can arouse the government which, so far, has shown scarcely more interest in Amazon’s dominance of book commerce than they would if they dominated the commerce in soft drinks or lawn fertilizer. Can they be awakened by publishers to this concern before dramatic cases affecting public awareness and policy are documented? We don’t know, but we do know that Hachette sent lawyers to Washington early in the Obama Administration to call attention to Amazon’s growing marketplace power and their willingness to use it. That apparently had no affect (unless, in some perverse way, it contributed to the government’s interest in pursuing the “collusion” case).

There could certainly be some consumer blowback to the gaming of search results by a platform, perhaps including Amazon. The Harvard article says Google changed algorithms that seemed to be burying Yelp because consumer sentiment, partly measurable in search queries, showed dissatisfaction among the public. But in the absence of an aroused government, it would seem unlikely that this suggestion will do publishers large or small much good.

It is definitely worth noting here that Hachette authors are involved in just such an effort right now over the current Hachette-Amazon dispute. (And Amazon authors, also often called “indie authors”, are pushing back in the other direction.) There is a difference of opinion about how much this is “hurting” Amazon or whether it will push them to a quicker resolution of the dispute; I’m not sure anybody will ever know the answer to that.

The third suggestion is to create an alternative platform.

As the piece explains, when MovieTickets was on the verge of dominating phone and online ticketing, Regal Entertainment and two other large theater chains formed Fandango.

Unfortunately, this is a strategy that simply won’t work as an antidote to Amazon. In fact, trying it, which publishers have, demonstrates a failure to understand the source of Amazon’s power in the marketplace.

Amazon’s strategy is in plain sight and is the title of the best and most recent book about them: Brad Stone’s “The Everything Store”. Books had a central role in getting Amazon started, but have now declined to very likely less than 10 percent of their revenue and far less of their operating margin. Books are strategic for Amazon, but not commercially fundamental. This is one of the reasons, perhaps even the principal one, why they operate their book retailing on margins so thin that the incumbent book retailers can’t match them. After all, B&N can’t make up the margin shortfalls created by offering books cheaply by selling that same customer a lawnmower. Nor do they benefit from additional scale provided by selling lawnmowers or cat food or server space.

The fact that Amazon did book retailing in a thorough and sophisticated way as they established their business to become an online Walmart made them different from omni-retailers in the past (going back to departments stores a hundred years ago) who sold some books.

The story has been told on this blog before about Amazon cutting prices more than fifteen years ago to discourage competition coming into the market. Although publishing is a profitable business for them, it is also a strategic component of larger objectives: getting an increasing share of its customers’ purchases across a range of physical products as well as to compete as a streaming content provider across the entire range of digital media.

No enterprise focused primarily on books can compete with that. Amazon takes too many customers off the table before whoever else is competing gets to begin and keeps them for a wide range of reasons. They’ve got the most admirable competitive position conceivable: a first-class operation supported by scale provided by myriad other enterprises, totally wide-ranging and broad knowledge of the details of book retailing, and the financial heft to accept diminished (or even negative) margins from time to time to support strategic objectives.

So, Bookish, the attempt to compete (although that objective was not explicitly stated) forged by three major publishers more than a decade after Ingram’s I2S2 attempt to create a broader base of online retailers, was never a serious threat. (It is now owned by another Regal, Joe Regal, whose Zola Books — an ambitious upstart ebook retailer — bought Bookish, apparently for its recommendation engine, from the publishers.)

This is probably the 20th year in a row, dating from their start in 1995, that Amazon has gained market share for sales of books to consumers. And that’s because consumers are making what for them is the obvious choice for convenience, total selection, and competitive pricing, as well as getting tied into Amazon through their PRIME program. Unless one of the other two tech giants in the bookselling world — Apple or Google — decides to make a dedicated effort to take some of that market share away from Amazon in both print and digital (and neither of them is much interested in print), it is hard to see where a serious competitor can come from.

As of this moment, there is no way for any ebook retailer except Amazon to put DRMed content on a Kindle, which eliminates a big part of the audience from play for any competitive platform.

The fourth suggestion: deal more directly. The article points out that people ordering takeout through online platforms like Foodler and GrubHub have often already chosen their restaurant so that restaurants that deal directly can afford to exit the platform.

As I was working on this post, HarperCollins announced that they have redesigned their website to be consumer-facing which enables them to sell books directly to consumers. They’ve collaborated with their printer-warehouse partner, Donnelley, to handle print book fulfillment and have a white-label version of indie ebook platform Bluefire to deliver ebooks. They promise that authors will be able to use the capability very easily to connect their own web presences and they’re thinking about additional compensation to authors that generate those sales.

This bold move has a hole in it, though, and it is one that publishers so far have no easy way to fill. All the non-Amazon platforms use Adobe DRM, which HarperCollins/Bluefire supports, so they can put your ebook on a Nook or Kobo device with copy-protection. Of course, they have their own “reader”, which can be loaded with ease on most web-capable devices and can apparently also be squeezed onto a Kindle Fire. But, because HarperCollins wants to continue to use DRM protection for the content, they won’t be able to sell directly to users of Kindle devices that are dedicated e-readers.

Although publishers have certainly encouraged that competition to Amazon which exists, their direct efforts have for the most part been limited to cultivating direct interaction with the end user audience to influence awareness and selection. Many smaller publishers are willing to sell direct without DRM and other large publishers sell direct in a more restrained way, but this seems to be the first concerted effort by a major player to drive direct sales.

It will be interesting to watch the pricing interaction between Harper and Amazon and whether Harper can come up with “specials” (bonus content, some connection to the author, bundling) that Amazon or another retailer can’t match. Competing on price is the retailer’s first instinct, but for publishers competing with Amazon on price is a fool’s errand, fraught with the potential for retaliation in many ways (including that “discounts” from publishers, the retailers’ margin, is presumably based on the publisher’s price. What does “publisher’s price” mean if they sell for less?)

But HarperCollins doesn’t need to get a big volume of direct sales for this to be a worthwhile initiative for them. I’d expect it to be copied. Any sales they can get directly increase their power in the marketplace.

There is one other initiative we’re aware of that can perhaps help publishers disintermediate Amazon for direct sales. That’s Aerbook, which widgetizes a book or promotional material for a book so that it can be “displayed” in any environment. Aerbook’s widgets can contain the capabilities for transacting or for referring the transaction to a retailer, Amazon or anybody else. Putting the awareness of the book directly into the social and commercial streams can be a big tool for authors and publishers. But even Aerbook can’t put a DRMed file on a Kindle. They offer a version of “social DRM” — essentially “marking” the ebook in a way that identifies its owner — which can be loaded onto the Kindle. But big publishers and big authors have apparently not yet come to a comfort level with that solution; perhaps the need to get to the Kindle customer directly and the experience Aerbook develops with their method will encourage a more open mind on that question over time.

So, it would seem, the best thinking presented by Harvard Business Review for how producers and service providers can dodge platforms trying to lock in their audiences has precious little that can be usefully applied by publishers to escape the grip of Amazon. Having taken about half the retail book market over the two decades of their existence, they have given themselves a reputation, tools, and momentum that will make it very hard to stop them from eating into the other half substantially in the years to come.

The fact that competing with Amazon is difficult doesn’t stop smart people from trying to figure out how it might be done. A group of publishing thinkers are holding a 2-day brainstorming session at the end of this month to come up with ideas. Two of them, Chris Kubica and Ashley Gordon, will be presenting at a session at Digital Book World in January called “Blue Sky in the ebook future”, which will include thoughts on how to improve the narrative ebook itself from Peter Meyers and somebody not yet chosen to speak about complex ebooks.


New data on the Long Tail impact suggests rethinking history and ideas about the future of publishing

For most of my lifetime, the principal challenge a publisher faced to get a book noticed by a consumer and sold was to get it on the shelves in bookstores. Data was always scarce (I combed for it for years) but everything I ever saw reported confirmed that customers generally chose from what was made available through their retailers. Special orders — when a store ordered a particular book for a particular customer on demand, which meant the customer had to endure a gap between the visit when they ordered the book and one to pick it up — were a feature of the best stores and the subject of mechanisms (one called STOP in the 1970s and 1980s) that made it easier. But they constituted a very small percentage of any store’s sales, even when the wholesalers Ingram and Baker & Taylor made a vast number of books available to most stores within a day or two.

It was an article of faith, and one I accepted, that if you could expose most books to a broad public, they would “find their audience”. The challenge was overcoming the gatekeepers or, put another way, the aggregate effect of the gatekeepers (the store buyers) was to curate, or act as a filter, to find the worthwhile books that the public would really see from which they would choose what to buy.

There was also ample evidence over time that a large selection of books in a store acted as a magnet to draw customers. That fact was noted by my father, Leonard Shatzkin, in the early 1960s, when they doubled the inventory at the Short Hills, NJ, Brentano’s store (the chain reported to my father, who was a Vice-President of Crowell-Collier, the company that owned Brentano’s, Collier’s Encyclopedia, and Macmillan Publishers, among other things) and it went from the worst-performing store in the chain to the best. In the 1970s, BP Reports published a survey that said that nearly half of bookstore customers chose the store they were in on the basis of the selection they’d find and more than half reported their particular purchase decision was made in the store.

By the late 1980s, both of the big national bookstore chains — Barnes & Noble and Borders — were undergoing a massive expansion of “superstores”. Whereas chain bookstores (B&N’s B. Dalton and Borders’s Walden) carried 20,000 or 30,000 titles, and large independents carried as many as twice that, now the new superstores would carry 100,000 titles or more! Customers flocked to the massive bookstores and the ever-expanding chains ordered lots of the publishers’ backlists and everybody celebrated a new era, except the independent bookstores who were increasingly squeezed by their new large competitors. The era was less than 10 years old when it got disrupted.

In the 1970s, it was my responsibility for a couple of years to write the orders for stores that accepted vendor-managed inventory from Two Continents, my family’s distribution company. I was being careful to make sure that each store earned $2 gross margin per dollar of inventory investment, which was what you’d get from 40% discount with inventory turned 3 times a year. This gave me a hands-on look at how stock turn in the aggregate was affected by the inventory decisions on specific titles.

When you do this, you figure out pretty fast that you can produce very high stock turn on books that are moving consistently. If a store were selling five copies a month of a title on a sustained basis and I put in 10 and replenished monthly, they would be getting an annual turn of 10 or perhaps much more on those moving books. (Turn calculation: sales divided by average inventory for a period multiplied by the number of such periods in a year.) That would support a lot of single copies of books that moved very slowly or, as it turned out, not at all. Since very few stores managed a turn of 3 or 4 on their own (chain store turns were usually under 2), giving the stores on our Plan a good result with the advantage of shipping monthly was shooting fish in a barrel.

But if you think about the turn you’re achieving with the titles that really move, know that the titles that move are a large percentage of the store sales, and take on board what stores’ overall turns tended to be, it leaves you with the uncomfortable feeling, or calculation, that a very high percentage of the titles each store ordered didn’t sell a single copy in that store. In fact, one big advantage of vendor-managed inventory is that it gives you the ability to use the high turn on your titles to stock the titles of yours that turn slowly or don’t sell at all, rather than having the store “waste” those margin dollars your books produce stocking somebody else’s slow-moving books.

Remember, in physical retail, selection was the magnet. The books that didn’t sell were helping to pull in the customers for the books that did sell. Stores knew that too. Later work I did demonstrated that there were whole store sections that turned at half or less of the rate of the store as a whole. But if you want, say, a philosophy section that “turns”, it would only have about ten titles in it. If you want a philosophy section people will browse and shop from, you have to carry a lot of slow-moving titles.

But just when the bookstores put the inventory in place to stimulate book buying all over the country, along came the Internet,, print-on-demand, and ebooks, in that order. All four were fully integrated into the book publishing ecosystem over a decade-and-a-half starting in 1995. As quickly as the magic of selection via the 100,000-title store was implemented, it was superseded by the “total” selection provided by Amazon’s, and then’s, “unlimited shelf space”. Now every book would have its full chance to sell, or so it seemed.

Unlike the period of superstore expansion, when substantial orders for deep backlist suddenly became commonplace in a continuing windfall for publishers, the new era with Amazon was characterized by things getting harder for many publishers. That wasn’t necessarily clear at first, but the impact of Amazon, and then Lightning (print on demand offered by Ingram) was to dramatically increase the number of titles competing for sales. It gave the Long Tail a real opportunity to get to customers which, through bookstores — even very big bookstores — only the top 100,000 titles were able to do. Publishers were a bit like the metaphorical frog in heating water; the challenges imperceptibly became greater over time. In 1990, a new book competed with about 100,000 available titles. In 1997 it competed with many hundreds of thousands and that number just kept growing. Today it competes with millions.

The challenges for conventional publishers got steeper again when ebooks became mainstream, pioneered by Amazon’s Kindle in late 2007. There had been a modest ebook business building for about a decade, but until Amazon committed its resources to creating a dedicated device, a repository of content, and audience awareness, it had a trivial impact. But a full-fledged ebook business unleashed a new wave of competition from self-publishing authors. Amazon fostered growth by creating an easy on-ramp for self-publishing, a move quickly copied by B&N, Apple, and Kobo. In the several years that ebooks have been commercially important, many — certainly hundreds and perhaps thousands — of authors have achieved meaningful sales. Many of those have been of backlist books originally published conventionally but there have also been thousands of successful original ebooks. Whether revived formerly-dead backlist or new titles, these are books that are competing with the output of the conventional publishers and wouldn’t have been a decade or two ago.

So the Long Tail for books has been a topic of conversation for most of the past 20 years. Amazon’s limitless shelves and Ingram’s Lightning contributed heavily to this before the turn of the century; self-publishing has accelerated it dramatically. The early expectations, including mine, were that the Long Tail would take sales from all the books being “currently” published. But it became evident pretty early that the big books were just getting bigger: the head of the sales curve wasn’t diminishing. In fact, both the head and the Long Tail took sales from the middle of the curve. This was particularly challenging for publishers because publishing mid-list, those books they do that aren’t bestsellers, became much more challenging.

The Long Tail continues to grow. There are a limitless number of aspiring authors and their aspirations to self-publish successfully are fueled both by success stories and by a growing band of indie authors who tout their success and question the business models and practices of the majors. Because being conventionally published has its own set of hurdles and time requirements, it has seemed to many (and I haven’t been immune from this thought) that self-publishing would just continue inexorably to take share from the publishing business.

But now we have some data that calls that assumption into question. I encountered two examples of that in the past week.

In Toronto last Wednesday, Noah Genner of Booknet Canada presented information about the Canadian market showing that the number of ISBNs was expanding rapidly, but that the number of individual ISBNs selling at least one single copy was about flat.

Then this week, Marcello Vena of RCS Libri in Italy published a White Paper based on his company’s data (link through to the White Paper from the DBW piece introducing it) which showed something similar. Sales of his company’s books were becoming increasingly concentrated in a small number of titles. Vena added an analysis using the Herfindahl-Hirschman Index (HHI). HHI measures the concentration in a market and is, according to Vena, used by the US Department of Justice to measure concentration in an industry. The HHI is calculated by adding the squares of the market shares of the players. So if one company owned 100% of a market, the HHI would be 100 squared, or 10,000. But if 100 players each owned 1% of the market, the HHI would be 100 times 1/10,000 (1/100 squared) or 0.01. Using the market concentration and title concentration numbers in tandem, Vena finds that they’re linked. As market concentration increases, the sales move to the head of the sales curve and flatten further in the Long Tail.

Of course, Italy and Canada are not the United States. Our market is bigger and richer. But Italy and Canada are not trivial samples, either.

One further point about Long Tail sales. In the aggregate, they can be very significant. But for each individual title, they are trivial. So the real commercial benefits flow to the aggregators — Amazon and Lightning — and much less to the publishers or authors of the individual titles. There certainly are situations where particular publishers have a lot of Long Tail books: the Oxford and Cambridge University Presses would be prime examples of this. For them, with thousands of titles in the Long Tail, the aggregate sales are probably commercially significant. But for a publisher with 100 titles, or even 1000 titles, selling a copy or two a year (or none), and that’s what we’re talking about here, it hardly makes any difference. I personally own several Long Tail titles. I get checks from somebody every month, but it adds up to three figures a year, not four.

The implications of this in the discussion of how the publishing industry might be affected by self-publishing disruption are interesting. It would suggest to me that the boosts publishers can give a book — even their catalogs provide more marketing lift than most self-published books start with — will become increasingly important as the market becomes increasingly flooded. If the data Vena has presented turns out to be the future trend, the increase in self-published titles will drive more and more sales to a smaller number of winners, and my hunch would be that the winners will most likely be from publishers. That would indeed be a paradox and a totally unintended consequence.

Of course, the publishing business isn’t one business; it is segmented. So far, the commercially successful self-published authors overwhelmingly, if not entirely, fall into two categories. There are authors who have reclaimed a backlist of previously published titles and self-published them. And there are authors of original genre fiction who write prolifically, putting many titles into the marketplace quickly. Successful self-publishing authors are often in both categories but very few are in neither. Those two categories are nearly 100% of the self-publishing success stories but a minority of the books from publishers. So, even before Vena published his White Paper, the idea that self-publishing would upset the commercial establishment was way overblown. If Vena’s data turns out to be prophetic, the road is going to get harder and harder for all books, but especially the self-published.

Two big items in the news today. On B&N’s decision to spin out Nook and college into a separate public company, I have little to say except to wish them all well. On Hachette’s and Ingram’s division of the two Perseus businesses, I’d say this. 1) The notion that this is about Hachette “bulking up” for the Amazon battle is almost certainly wildly wrong and anybody saying that has disqualified themself as an expert. 2) The titles Hachette get here really change the character of their list, adding a non-fiction and academic dimension they never had. 3) Ingram has made a major leap in scale for their Ingram Publisher Services business which now, in the aggregate, is Big Five sized.

Once again, the Feedburner service failed to distribute my most recent post, which was a graf-by-graf disagreement with a post by Hugh Howey. The comment string of that post contains ample evidence that the fact contained in the last paragraph here is not widely acknowledged.