Passive Guy talks a lot about disruptive change as it impacts the publishing business.
The following excerpt from a short article summarizes some of the reasons large established businesses are often unable to respond to a newer, cheaper disruptive technology that enters their world.
In 1995, [Harvard Business School Professor Clayton Christensen and a co-author] proposed a new causal mechanism that explained the surprising failure of highly-regarded companies. The most punishing innovations, they argued, were the ones that were easy to dismiss at first blush — simple, affordable solutions that took root outside the mainstream market. The authors called these “disruptive” solutions and provided a straightforward prescription for leaders looking to turn disruption into an opportunity. They suggested that companies should find a customer who loved the disruptive solution despite its limitations and create a separate organization to commercialize it.
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Yet, the innovator’s dilemma persists. Just ask executives at Blockbuster Video, Sony, Nokia, Microsoft, Hertz, Kodak, Delta, and nearly all newspaper companies. That’s not to say that there haven’t been success stories. But they’re notable because they are exceptions.
So, why has this dilemma persisted?
Capital markets is one explanation. As this argument holds, the short-term pressure of the capital markets, coupled with management incentives tied tightly to stock prices, make it hard for companies to invest in new growth businesses. Even if companies know what they need to do, their investors won’t let them.
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Perhaps the root problem is leadership limitations.
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Every once in a while a Steve Jobs, a Jeff Bezos, or an A.G. Lafley appears, but perhaps their rarity leads to the dilemma’s persistence.
Maybe the real challenge lies within. Over the past few decades there has been a fascinating set of research into cognitive biases that lead smart people to make bad decisions. These biases are particularly acute for companies trying to drive disruptive innovation. Consider the “halo effect,” which holds that people who are demonstrably good at one thing are perceived to be good at non-related tasks. The halo effect leads companies to assume their best operators can seamlessly shift into innovation work. Some can, but many cannot. Confirmation bias, disaster neglect [is the worst-case scenario imagined really the worst?], the fundamental attribution error and many others make it easy to simultaneously discount the need to respond to disruptive threats and overestimate the organization’s ability to step into new markets.
Link to the rest at Bloomberg
Disruptive changes are similar in some ways, yet each has its own quirks.
Big Publishing demonstrates a lot of characteristics of large companies being disrupted in other industries. Big Publishing and those who depend upon it for their livelihood demean authors who self-publish. Even as indie-published books continue to grow their sales, Big Publishing denigrates their quality and denies their signficance.
One of the most interesting critiques of indie authors relates to the way many price their books. Big Publishing points to the low price and claims that’s the reason the books sell. They are partially correct, but low prices are one of the competitive advantages of self-publishing. Low prices are one of the fundamental characteristics of disruptive change almost everywhere it is found.
If you’re a big established company and see a smaller competitor with a business model that’s different than yours who is happy to sell a competing product at a lower price than you do, you should be afraid. If some of your customers begin to buy the low-priced alternative, you should be very afraid.
Self-publishing is different from a typical low-priced disruptive technology which begins in small companies who are able to scrape by on low profits for the first few years. In the case of indie publishing, the profits are much higher for many successful authors then they were when those authors were published traditionally. Joe Konrath, Kris Rusch, Dean Wesley Smith and Barry Eisler come immediately to mind.
One of the interesting aspects of this disruptive change for Passive Guy is that publishers are almost completely oblivious to the idea that authors are their suppliers and miss important implications of this relationship.
Well-managed companies treat their suppliers very nicely. Well-managed companies understand their suppliers need to earn a reasonable profit in order to be successful. They understand that the success of the supplier and the success of the company that uses what the supplier produces are intertwined. Well-managed companies know that if they developed a reputation for mistreating suppliers, they will have a difficult time maintaining an adequate supply chain.
PG thinks Amazon was necessary for the disruptive change in publishing to take place. If it hadn’t been Amazon, it probably would have had to be someone like Amazon.
However, by itself, Amazon would not have been able to make the disruptive change as far-reaching as it has become. There is no doubt that Amazon as a bookseller would have brought major changes in pricing, but Amazon as a publisher (PG is not talking about the Amazon imprints.) required indie authors who could produce books that Amazon customers wanted to buy.
Amazon set the stage because it championed e-books and because it was willing to pay authors a much larger percentage of the sales price than they would receive from Big Publishing. Big Publishing has evolved into a pricing cartel with respect to its suppliers, offering virtually the same royalty percentages to authors, regardless of which publisher is making the offer. Price competition is essentially limited to the amount of the advance.
By offering authors a 70% royalty (or a 35% royalty, but 70% worked better), Amazon attacked Big Publishing through its supplier network. While the traditional publishing business model thrived on a certain degree of scarcity (Which publisher could release 10,000 books each year?), Amazon was not thus constrained. If 100 new books were self-published in a day, that was fine with Amazon. If 1000 new books were published in a day, that was fine with Amazon. Scaling this supplier network was mostly a matter of throwing more computers online.
If every single author currently published by Big Publishing decided to self-pub his/her next book on Amazon, the computers in Seattle would never break a sweat.
Amazon treated its suppliers well by paying high royalties and making it very simple for anyone to become a supplier (no query letters or agents required). Since Amazon was already the biggest bookstore in the world, it was ideally suited for hosting thousands and thousands of indie e-books and allowing readers to decide which ones they like the best.
However, even in this market competition, many of the “losers” don’t feel very bad. Their income from Big Publishing was probably zero. Their income from Amazon is probably greater than zero. They may not be able to quit their day jobs, but they earn enough money from their writing to go out to dinner once in a while. Even if it’s only McDonald’s it feels kind of cool.
As is typical with disruptive change, the publishers are reacting in exactly the wrong ways. Instead of treating their suppliers better, they are treating them worse.
In response to the drip, drip, drip of authors defecting to indie publishing, publishers are trying to tie up authors for longer and longer periods of time. In response to authors earning serious money from self-publishing their backlists, publishers are inserting out-of-print clauses into publishing contracts that mean books will never go out of print and revert to the author.
This self-destructive behavior is making it more likely that a promising new author who is beginning to make some noise on Amazon will decline a big publishing offer when it arrives.
Clayton Christensen’s research says it’s almost impossible for the incumbent powers to survive disruptive change in any form remotely resembling their former selves.
While PG never rejoices when people lose their jobs and is not enthusiastic about Schadenfreude, it will be interesting to see how we regard names like Simon & Schuster and HarperCollins five or ten years from now. If we remember them at all.