Home » Big Publishing, Disruptive Innovation, Ebook/Ereader Growth, Mike Shatzkin, Passive Guy » The three forces that are shaping 21st century book publishing: scale, verticalization, and atomization

The three forces that are shaping 21st century book publishing: scale, verticalization, and atomization

16 April 2013

From publishing consultatant Mike Shatzkin:

There are three overarching realities that are determining the future course of book publishing. They are clear and they are inexorable:

Scale, and its close cousin “critical mass”, is the ability to use size as a competitive advantage in any endeavor;

Verticalization, or being in sync with the inherent capability of the Internet to deliver anything of interest in an audience-specific way; and

Atomization, or the ability for any person or entity to perform the most critical component of publishing — making content available and accessible to anybody anywhere — without capital and without an organization dedicated to distribution.

. . . .

In the 20th century, scale in publishing was really an internal concept. Big publishers had more resources to sign books, get to bookstores, and roll out marketing than smaller ones. Barnes & Noble and Borders had supply chain and cost advantages over independent bookstores, except that Ingram and other wholesalers lent their scale to provide partial compensation. Bigger literary agencies had negotiated more boilerplate agreements than smaller ones and often had helpful relationships that went beyond publishing, but a single operator could still cultivate enough editors to make a legitimate case that he or she could place a book as effectively as the giants.

But that’s changed entirely in the past 10 years. Now publishing operates in a world increasingly controlled by Amazon, Apple, and Google, all companies that make far more money outside of books than through books. One Big Six CEO observed to me about five years ago that the time had passed when s/he could call all the biggest trading partners of their company and reach the CEO instantly. Penguin Random House has merged into a publishing company that will control about half the most commercial titles in the marketplace, but any suggestion that their size will enable them to dictate much to Amazon, Apple, or Google is deluded.

What Random House can do is apply scale against other publisher competitors. And they will.

Critical mass is a scale-related concept but it is also a component of verticalization. When a publisher, or any aggregator, has enough material to allow it to ignore competition in a consumer offer, it has achieved the effective barrier to entry that scale also provides. For example: subscription models for general books are a very difficult commercial proposition because the biggest agents for the biggest authors wouldn’t want their titles included. But Amazon might just have so many titles they can make available through a subscription offering that they can do it successfully even without the top of the bestseller list.

. . . .

The barrier to entry for book publishing was always relatively low compared to other media: magazines, newspapers, radio, TV, and movies would all require much more of a financial and organizational commitment than was required to publish a book. But there definitely was a fence around the book publishing world, and the position of “gatekeeper” was both well-earned and well-rewarded.

But those days are gone too.

As of this writing in April 2013, sales of any book of narrative reading will, depending on topic or genre, be 20% to 60% in ebooks, which requires no inventory investment and minimal distribution infrastructure. Sales of the printed books — the other 40% to 80% — will be anywhere from 25% to 50% through online channels. Those sales can also be achieved (largely through Amazon) without an investment in inventory, printed at the moment they’re ordered.

Link to the rest at The Shatzkin Files

PG will observe that large organizations dealing with disruptive changes to their businesses have a number of very challenging problems:

+ They don’t have the right employees. The employees necessary for the old business are probably not the right employees for the new business. This is a particularly acute problem in the executive suite.

Hiring a bunch of new employees doesn’t work for a variety of reasons. For one thing, there is typically an age difference. The old business has older employees, including a lot of lifers. The old business doesn’t realize how weird its corporate culture feels to employees necessary to operate the new business. Ultimately, regardless of what the CEO says, the culture doesn’t want to change. The old employees are masters of the politics of dealing with current management and know how to shoot down or slow down new initiatives.

New employees and what seem to the old organization to be radical new ideas are treated like bacteria invading a human body. The immune response of the old organization is powerful and manifests itself in many ways. Instead of focusing solely on building the new, valuable time of the new employees is involved in dealing with the immune response. If the organization has hired really talented new employees, those employees will leave for greener pastures where there aren’t any immune responses, leaving the big new thing left half-done. If the organization tries to tie talented new employees down with employment contracts, they’ll responde with low morale, start leaving early and spend their evenings and weekends working on independent projects.

+ The size and resources that give organizations access to scale in the old business slow them way down as they try to adjust to the rapidly-changing new business. Yes, they can eliminate departments and fire people who are no longer needed, but that requires time and places a tremendous drag on the morale of the survivors. Having a billion dollars invested in people and infrastructure necessary for the old business and irrelevant for the new one is a big management problem and a boat anchor for a company that needs to move quickly.

+ Finances preclude dumping the old business model as quickly as is strategically desirable. What CEO is going to give up a billion dollar revenue stream that exists today but will be a $50 million dollar revenue stream in five years?

Current revenue is the shiniest of shiny objects for a typical financially-oriented executive. Instead of putting all resources into the potential five billion dollar revenue stream of five years into the future, the executive deludes him/herself that the organization can do two things well, one entrenched in the past while the other pioneers the future.

When the real (as opposed to perceived) competition is 100% focused on the future, this strategy almost never works.

The tech world is littered with the corpses of highly-impressive companies with really smart CEO’s who failed when they tried to ride two horses at the same time. Yes, some companies are able to be successful in lots of different businesses, but none of those businesses are typically facing a serious technology disruption.

Big Publishing, Disruptive Innovation, Ebook/Ereader Growth, Mike Shatzkin, Passive Guy

14 Comments to “The three forces that are shaping 21st century book publishing: scale, verticalization, and atomization”

  1. “The immune response of the old organization is powerful and manifests itself in many ways. Instead of focusing solely on building the new, valuable time of the new employees is involved in dealing with the immune response. If the organization has hired really talented new employees, those employees will leave for greener pastures where there aren’t any immune responses, leaving the big new thing left half-done.”

    I was never a fly on the wall at Borders, and haven’t read any articles from anyone who was, but I’m reading your comments and all I can think about is their lame, flaccid and ultimately abandoned attempt at book e-commerce.

  2. “New employees and what seem to the old organization to be radical new ideas are treated like bacteria invading a human body. The immune response of the old organization is powerful and manifests itself in many ways. Instead of focusing solely on building the new, valuable time of the new employees is involved in dealing with the immune response.”

    Great metaphor, PG. One reason I read you every day is because I love what you say and how you say it.

    You’ve described every company I’ve ever worked for, and none were high tech. Seriously: have you ever though about writing a book about corporate culture? (and forgive me if you have already and I’m too self-absorbed to have noticed.)

  3. “Penguin Random House has merged into a publishing company that will control about half the most commercial titles in the marketplace”

    “Amazon might … even without the top of the bestseller list.”

    Squeeze that sand! Squeeze it! Don’t! Let! It! Slip!

  4. I have spent way too much time in my career “dealing with the immune response”.

  5. PG, your take about , to paraphrase, wrong people for right times/ dusty people for fresh times/ out of touch princes and princesses ensconced in castles whilst the phillistines make huge incursions with the SUBJECTS of those crumbling kingdoms… and your pointing particuarly to the hierarchy… from my close-in experience, is en puente, live on the mark.

    I’d add the throat rattle is not necessarily tied to a pyschopomp’s age but to their position/title often and their gluttony for the high ‘litah-rarie’ life, to have their condo/penthouse/and to rub shoulders with those ‘famous’ or about to be. To be ‘important’ parasitically over whomever and whatever they think they ‘made important’ in the world of books.

    Whether it’s publicity, marketing, acquisition, the myriad vp’s of this and that, presidents of such and such, head of whatever imprint, there are GOOD people, but often they too are raided by the upper echelon and given absurd mandates they must perform to whomever’s mastadon satisfaction.

    And you are right: Some at the very very top couldnt hold a candle in a convo with Sergey or Bill or Eric or Jeff, or Mark or ebay Woman or Julian. But they ought to be able to understand and hold their own, and moreso, unleash ideas. They instead only launch books, and too often driblle out same ol’ same ol’.

    The game cant be played all prissy with regards to one’s station in publishing, that is, trying to preserve one’s own station… while trying to satisfy the narrowly held stockholder ‘bosses’ who dont know squat about publishing. The leaders need to be more than visionary; they need go wild and go for it. None of the men and women named above were plodders and oh so conscious of their place in society’s 500. They lived unleashed. And have tried to remain so. And have the market territory to prove it.
    Justmy .02

    • “But they ought to be able to understand and hold their own, and moreso, unleash ideas. They instead only launch books, and too often driblle out same ol’ same ol’.”

      Agrees with everything. That said, there’s a reason why “culture” is such a huge topic in the corporate world right now. Everyone talks about, reads books and articles about it, will tell you how “great” theirs is and will interview you based on how you may or may not fit into it. Companies breed it, nurture it, maintain it and grow it.

      And more often than not, I think, it gets in the way of anyone ever doing something new and different. Your CEO charts the company’s course and, if you like your job, you follow it.

      I’ll be as critical of BPH’s and B&N, et al, apparent stupidity as anyone else but, in all fairness and having worked in large companies and organizations, it’s easy to be an indie with 500$ on the line when you upload vs. a CEO with billions of dollars and hundreds (or thousands) of jobs at stake. Executives and CEO’s don’t get to corner offices because they’re free spirited artists and dreamers catering to their muse and their creative passions. They’re “money” men and women who live and die by numbers and risk-adversity is their strongest instinct.

      “What CEO is going to give up a billion dollar revenue stream that exists today but will be a $50 million dollar revenue stream in five years?”

      This just about sums it up for me.

  6. In all the years I have been following disruptive innovation in various industries (a fascinating hobby, until they come to disrupt you), I have seen exactly one large company deal with disruption smoothly and seamlessly, and emerge stronger at the end. That was IBM, with the original PC. They got round the difficulties you mention by setting up what was, in effect, a whole new business under the IBM trademark. The PC division hired its own engineers, did its own purchasing, built up its own outside dealer and service network — it didn’t even use IBM’s famous sales force. Inside of two years, IBM was the market-share leader in the newest and fastest-growing sector of the computer industry, and neither their competitors in PCs nor the old-line mainframe people at IBM ever quite knew what hit them. It was brilliantly done.

    So far, I’m afraid, I have not seen any old-line publishing company do anything about disruptive change that I would describe as brilliant. They have done a few things that were routinely intelligent — but routine intelligence isn’t what carries you through disruption.

    The one really brilliant move was made by Amazon, with KDP. No big publisher was willing to set up a KDP, because it runs against the nature of their business as they see it. Publishers are not in business to sell books to the public, but to control books — to own the intellectual property, tie it up in contracts, and exploit it on their own terms for their own gain. The last thing they want to do is provide publishing services to authors who retain all their own rights.

    • IBM was one of the rare exceptions I was thinking about as well, Tom.

      They did do the licensing deal for PC-DOS that allowed Microsoft to license MS-DOS, however. It was great for the PC ecosystem, but ended up disrupting IBM’s PC business plans after a few years.

      • PC-DOS was actually a fairly minor factor in that particular disruption. (Many other companies licensed MS-DOS in the early eighties, but their computers failed in the market because they were not hardware-compatible with the PC.) What mattered more was the ISA architecture. The whole hardware design of the original IBM PC was done with off-the-shelf components and without patent protection. Anybody could build a PC clone. The only protection was the copyright on the BIOS. As soon as Columbia and Golemics cracked that code and figured out how to write a non-infringing third-party BIOS, the jig was up.

        Even so, IBM dominated the market for several more years, and would have gone on doing so if they hadn’t made the stupid decision to abandon their own architecture for the proprietary PS/2 design. Yes, the PS/2 was clone-proof; but the standards had already been set. Forced to choose between the industry standard and the IBM name, thousands of corporate customers chose the standard. It was a mistake they had never made in the mainframe business, and I like to think that Don Estridge, the mastermind behind the original PC, would never have made it either. But he had died in a plane crash two years before the PS/2 came out, and the PS/2 design was dictated by salesmen and bean-counters.

        (I just did a spot of work to check dates on the PS/2. I note one unsourced claim that IBM were willing to license the MCA bus design to clone makers, but they demanded a royalty on each PC clone that the licensee had ever manufactured. If this is true, it’s hardly surprising that no clone makers were willing to sign the licensing agreement. Why, it sounds like a contract a publisher would write!)

  7. I can’t believe Shatzkin equates Author Solutions with CreateSpace. Author Solutions is there to con authors, and CreateSpace is a service to authors. How can he not understand the difference? And how can he not understand that buying Author Solutions was not a smart move?

    • Understanding how that equation works is a key to understanding the mindset of big publishing. From the Big Pub point of view, taking money from authors is a business strategy. Any endeavor that makes money off of authors is in the same category. Whether or not the author makes money is totally irrelevant. They believe in the infinite supply of authors who are suckers. They may be correct in that belief.

  8. Excellant points, PG. I too have worked for companies that couldn’t cope with the changes needed to go hig-tech. One was even supposed to BE a high-tech company.

    It is often like dancing with dinosaurs. You know they’ll be extinct soon because they just can’t adapt.

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