The financial reports of the major publishers have been following a pattern for some years now. Sales are about flat but profits have been steadily rising. One explanation for that fact is that the management of the major houses have been diligent about adapting their businesses to the new marketplace configurations or, as the saying goes, “squeezing costs out” of their operations.
But it could be more than that. In a piece published here well over two years ago, I said it was an “old joke” of mine that “Amazon is every publisher’s most profitable account” which, I observed, was not their objective! That has seemed apparent for well over a decade.
The explanation is simple. Amazon is the account that sells the most units with the least returns. Because Amazon has contractual relationships with the biggest publishers rather than purchasing from their published discount schedules, there is no way for an outsider to know exactly what the sales terms are. But the discounts and marketing fees to Amazon would really have to soar from the standard terms they began with to claw back more than the excess margin they deliver compared to other accounts.
So as the business shifts to Amazon, and it certainly looks from the outside like they are half or more of many publishers’ business, it shifts from lower-margin accounts and publishers make more money.
And because the big publishers have the lion’s share of the high-profile books, they are effectively insulated from being cut off in a trading dispute. It is likely that there is a growing gap between what the larger publishers get as a percentage of the retail price of their books and what smaller publishers can get from Amazon. That drives another component of current publisher economics: the growing consolidation of distribution under the major houses and Ingram.
As the business moves to Amazon, the publishers need more of the “normal” print volume to maintain their sales-and-distribution structures, to pay for the sales reps and warehouses. But gently declining print units mean per-unit costs will rise unless they are augmented by other people’s books in distribution. So far, for the most part, they have been because the smaller publishers are also seeing the same trend and find it harder and harder to support their own sales and distribution structures.
Aside from distribution, the other big anchor to give the publishers the throughput they need to sustain their operations are the titles from big authors. Even with their economic advantages and great internal marketing capabilities, Amazon is really not a threat to take the biggest authors away, either through their own publishing operations or through self-publishing. Big authors are already rich and publishers are willing to pay them advances that effectively amount to royalties much higher than the contractual standards. What the big authors are mostly interested in, beyond the money, is maximum exposure. They want to be on sale in the largest possible number of places and reach the biggest number of readers. That is the key to making more money through dramatic sales to Netflix or Amazon or, particularly in the case of non-fiction, doing even more lucrative speaking tours employing the celebrity their books deliver them.
It is true these days that with IngramSpark capabilities available to anybody, which can include sales force help to place books throughout the retail network, that an author who really wants to spend serious money and attention can self-publish his/her way to broader distribution. But they certainly couldn’t do it with the effectiveness of a major house, at least not right off the bat. And with the actual royalties big authors are getting with their guaranteed advances, it is really not tempting to go to a lot of extra risk and effort to perhaps earn a wee bit more margin.
In addition to the margin growth that comes from business shifting from scattered retail locations with relatively higher returns to Amazon, publishers are seeing growth in export sales, backlist sales, and, perhaps most dramatically, in digital audio sales.
The export sales are a natural outgrowth of an increasingly global world. Publishers are promoting more digitally, and online promotion — even through email addresses gathered over time — does not stop at the water’s edge. Digital marketing alerts the world, and an increasingly sophisticated global supply chain (both Ingram and Baker & Taylor have made substantial efforts to move books across oceans more efficiently) result in organic growth of export unit sales.
Audio has also been a bit of a bonanza since the digital revolution has changed the marketplace into one where just about everybody has an audio-capable device in their hands all the time. This is, of course, another “win” for Amazon, which owns Audible, the dominant force in audiobook production and distribution. One arm-wrestle which hasn’t played out yet will be between Audible and Apple, which sell each others’ product in a relationship that must be a somewhat uncomfortable dance between companies that are otherwise competing..
And easier-to-make backlist sales are another source of extra margin for publishers. In the pre-Amazon, pre-digital age, only the books that were actually in stores had much of a chance to sell. Even for the most capable publishers, most of the backlist simply wasn’t ubiquitously available a few months past publication date. Now, with more than half the sales made online, that’s no longer an issue. If the book is in print, it can be purchased. Publishers are increasingly awake to the modern reality that any book can get hot at any time, and sales efforts don’t have to wait for books to be positioned at retail locations to be effective.
And with Ingram’s Lightning Source and Amazon’s Kindle Direct Publishing, or KDP (previously known as CreateSpace) available to deliver even a book with no printed inventory pretty much instantly, the number of books really available now far exceeds the number of titles sitting in anybody’s warehouse, including the publisher’s!
So the bad news for publishers — a dramatically shrinking store network with its last big chain, Barnes & Noble, in a steady decline that shows no signs of stopping — has, so far, been more than compensated for (in profit margin if not in unit volume) by growth. Sales shifts to Amazon have improved margins and reduced costs. Growth in backlist sales and export sales and audiobook sales have, so far, compensated for the loss of print book units that previously would have sold through the bookstore network.
One place Amazon would seem to have a big advantage over legacy publishers is in building the market for an unknown author. Amazon has an unmatched ability to put a relevant suggestion in front of book purchasers as they shop. So far, that has not translated into a competitive advantage for them with agents because most agents would really prefer to get their authors a “real” publishing deal that will expose them throughout the book marketplace. But combined with the data Amazon has on self-publishers, it certainly gives Amazon an edge in discovering new talent. Perhaps we’ll start to see authors discovered and launched by Amazon who move on to more traditional arrangements. (And maybe we have seen it already, but I just don’t know it!)
Of course, Amazon will make continuous efforts to pull back more of the margin their sales are generating for publishers. If you sat in their seat, you’d see no reason why you should be any more profitable for publishers than whatever is their next most profitable account. And you’d have a toolbox with ways to address that challenge.
At some point it is possible — maybe even likely — that the national mood about monopoly control will shift and Amazon will have to be very careful about how it uses the power of its market position to extract better trading terms. Maybe they already feel that possibility and it has restrained them.
But the ironic paradox persists that as Amazon’s marketplace power has grown in relation to the other retail accounts over its first two decades plus, so has the power of the largest publishers grown in relation to the smaller ones. Those two facts are connected.
I’m writing about climate change and politics elsewhere, keeping The Shatzkin Files focused on book publishing. This is a recent piece proposing two ideas to address climate change and another making the early case for Amy Klobuchar to be the next president.
“The Book Business: What Everyone Needs to Know” is the book I co-authored with my late friend Robert Paris Riger for Oxford University Press, officially arriving on March 1. There is a party for it at The Strand in Manhattan on Tuesday, March 12 at 6:30. Michael Cader and I will discuss the topic, and take some questions. All are welcome, but if you’d like to come send a note to [email protected] and tell her. She’s trying to keep a count.
And I’m really delighted to have been chosen to receive a Lifetime Achievement Award from the Book Industry Study Group at their annual meeting on April 26. That’s an honor I would never have expected. My nearly six decades in this business (first job: June 1962 as a clerk on the sales floor of the just-opened paperback department of Brentano’s Bookstore on 5th Avenue) have been sheer joy, having conversations with smart people about things that I find endlessly interesting. To get an award for doing it is, truly, icing on the cake.