Home » Big Publishing, Disruptive Innovation, Mike Shatzkin, PG's Thoughts (such as they are) » Stability in the book marketplace does not mean commercial publishers continue to maintain their share

Stability in the book marketplace does not mean commercial publishers continue to maintain their share

14 December 2017

From veteran publishing consultant Mike Shatzkin:

Publishing reporters doing wrap up stories occasionally call me for impressions. From those conversations I have gleaned that the prevailing impression of where the book business is now is of “stability”. The consensus about adult trade is that ebook sales have stalled or perhaps even receded, that print is strong, and that the big publishers have beaten back the threat of disruption from indies that a few short years ago seemed like a massive threat.

But while that picture has accurate aspects, it is really incomplete. The world of commercial publishing — even factoring in the growth in juvie books and audio — is shrinking more slowly than it was a few years ago, but it is still shrinking. One “tell” is that Amazon doesn’t believe ebook sales are reducing, they see them growing. Part of that is that Kindle is taking market share from all the other ebook platforms (except possibly Apple iBooks, at the moment). Part of that is that Kindle has titles nobody else has, as some self-publishing entities just use the dominant platform and skip the rest. Part of that is that Kindle doesn’t just sell ebooks; it provides subscription access through Kindle Unlimited that in the aggregate logs a lot of eyeball hours. And almost no big publisher commercial content is included in Kindle Unlimited.

. . . .

The impression that big publishing is shrinking has anecdotal support. S&S CEO Carolyn Reidy . . . recently acknowledged that romance fiction had become very challenging for conventional publishers. Of course, genre fiction is precisely the area where indie authors and Kindle Unlimited have made the biggest inroads.

. . . .

But while maintaining ebook prices well north of ten dollars may be what Barnes & Noble and indie bookstores need to keep selling printed books, those prices cut publishers off from growing chunks of the market that prefer to choose from the wealth of much cheaper books on offer from indie authors and smaller, often digital-first, publishers.

. . . .

The under-reported media story of the 21st century is how well book publishers have adapted to their new world, better than their counterparts in any other print content business. Top line revenue for the majors is flat or shrinking slightly, but profits have been maintained. One big reason for that is that returns go down as sales move online, and print sales are now in the neighborhood of half online. Profitability in these circumstances underscores the point that Amazon is the most profitable account for just about every publisher. It moves half or more of the books, requires minimal staffing to cover, and has, by normal standards, very low returns.

The challenge, of course, is that Amazon has no interest in being publishers’ most profitable account. Amazon does everything they can to claw back margin from publishers and always has a looming threat with their own publishing program, which at any time could reconsider the idea it abandoned a few years ago of going after big trade books outside the genres.

Link to the rest at The Shatzkin Files

PG was a little hard on Mike Shatzkin in his last TPV comments that referenced one of Mike’s posts.

The process of a particular style of creative destruction, described as disruptive innovation by now-famous Harvard Business School professor Clayton Christensen in his 1997 book, The Innovator’s Dilemma, is something PG has observed over and over, primarily among technology companies, but not limited to that business sphere.

PG is not alone in his appreciation for Professor Christensen. The Innovator’s Dilemma has been included on countless lists of the best business books of all time. See, for example, herehere, here, and here.

A few of the victims of disruptive innovation in the technology world, a space with which PG is quite familiar, include names that were once dominant in their industries: Kodak, Nokia, Blackberry, Wang, Sun, Lotus, WordPerfect, Borland, and Novell, to name just a few.

Disruptive innovation has impacts far beyond traditional technology companies, however.

Apropos of the bookstore world, major retail companies and industries based upon people coming into physical spaces to purchase products have either disappeared or are disappearing in the face of technology innovations including, but not limited to Amazon’s. See, for example:  Sears, Montgomery Ward, Macy’s, KMart, Blockbuster and Borders.

More than 300 retailers have filed for bankruptcy this year, including Gymboree, The Limited, Radio Shack (again) and discount shoestore chain, Payless ShoeSource.

According to Time, 1,500 shopping malls were built in the U.S. between 1956 and 2005, but, today, these great retail inventions of the latter part of the 20th century, are closing down at an increasingly rapid pace. Between 2010 and 2013, mall visits during the holiday season, the busiest shopping time of the year, dropped by 50%.

There are still about 1,100 malls in the U.S. today, but a quarter of them are at risk of closing over the next five years, according to estimates from Credit Suisse. Other analysts predict the number of malls closing be even higher.

Again, in Time:

A growing number of Americans, however, don’t see the need to go to any Macy’s at all. Our digital lives are frictionless and ruthlessly efficient, with retail and romance available at a click. Malls were designed for leisure, abundance, ambling. You parked and planned to spend some time. Today, much of that time has been given over to busier lives and second jobs and apps that let you swipe right instead of haunt the food court. Malls, says Harvard business professor Leonard Schlesinger, “were built for patterns of social interaction that increasingly don’t exist.”

PG says bookstores aren’t special retail snowflakes. The forces impacting malls are no different in their effect on physical bookstores. The only remaining major US physical retail outlet for list-price hardcover/paperback books is, of course, Barnes & Noble. Borders has already disappeared as have B. Dalton, Coles, Crown Books, Hastings, Krochs & Brentanos, Mediaplay and Waldenbooks.

PG suggests that three categories of disruptive change are impacting the traditional book business:

  1. Ecommerce
  2. Ebooks
  3. Profitable self-publishing via Kindle Direct

If ecommerce alone is enough to radically change the world for many physical retailers, imagine what two additional disruptive developments will do to traditional publishers and retail outlets for books.

Mike notes a fourth major development in the OP: Amazon is the most profitable place for major publishers to sell books.

Viewed properly, ebooks are a gift from heaven for traditional publishing profits:

  1. Create and upload a digital file to Amazon and other ebook outlets.
  2. Periodically check to see how much money arrived via bank transfers.

Yet Amazon is traditional publishing’s Great Satan because (with no malice that PG has observed) Amazon is changing power dynamics in publishing.

For one thing, Amazon likes to sell things at low prices, lower than prices charged anywhere else, including other places where books are sold.

For a second thing, one of Amazon’s earliest decisions was to make it easy for authors to self-publish both ebooks and POD paperbacks. Amazon also made it profitable for a great many authors to self publish through royalty structures that are vastly more beneficial to authors than those in traditional publishing contracts.

Easy and profitable. What’s not to like?

In the OP, Mike quotes the S&S CEO as admitting that romance books “had become very challenging for conventional publishers.”

Well, of course.

Why? (besides easy and profitable)

Romance authors have traditionally been treated in a disrespectful and condescending manner by a great many mainstream publishers. Since romance has always (or at least for a long time) sold large numbers of books to loyal readers, PG has wondered why. Perhaps it’s a perceived social or class thing. Publishers may regard romance as a necessary evil of their business, not deserving of the star treatment they provide for authors writing about more respectable characters and subjects, the kind of people who would have attended Wellesley.

Perhaps as a result of past disrespect which has toughened them up, a lot of smart women who write romance were happy to give KDP and other epublishing platforms a try. The computers didn’t care if you attended Wellesley or not, plus ebooks paid a lot better, you were in control and could write as many books as you wanted to. Plus, your readers had no problems locating and purchasing your books without dealing with sometimes-arrogant book store employees.

Amazon hearts romance authors. What’s not to like about that?

(No offence is intended toward Wellesley graduates, whether they write romance or not. PG’s grandmother graduated from Wellesley a very long time ago. She was a very nice person with a college friend she called Bunny.)

In PG’s surpassingly humble opinion, a variety of poor business decisions extending over many years have made it likely that an increasing number of traditional publishers will cease to be profitable in the foreseeable future. Poor profitability has been masked in recent years through a large number of mergers and acquisitions, but eventually that solution will dry up.

When a traditional publisher runs into financial trouble and is acquired by an investment bank or some other entity with a modicum of financial acumen, guess what’s going to happen.

  1. Costs of the newly-acquired publishing business will be examined in detail with particular attention being paid to potential cost savings.
  2. Sources of income will be examined with their fully-loaded costs, including personnel costs associated with each stream of income, to determine their true profitability.
  3. The new owners will determine that ebooks are by far the most profitable part of the publishing business.
  4. The new owners will determine that a huge number of expenses are tied to printed book operations, including a large portion of the firm’s overall personnel expenses and costs of third-party service providers that enable printed book operations.
  5. The new owners will attempt to outsource tasks performed in-house such as editing and as much of the content acquisition labor as possible.
  6. Layoffs, including elimination of layers of management no longer needed in the leaner publishing organization, will be a rational step for new owners who want to harvest income from the publisher.
  7. If the real costs of print books cannot be reduced enough to reach target profitability, print prices will be increased.
  8. If print can’t be made profitable, print rights will be sold to the highest bidder and further layoffs will follow.

Needless to say, all the changes in traditional publishing directed by the new owners will result in substantial anxiety for a great many traditionally-published authors. At a minimum, after selling off remaining stocks of an author’s print books, future print runs will either be substantially reduced or eliminated, depending upon the profitability of the individual author’s print titles when considering all associated costs.

If financial analysis causes a traditionally-published author to fall into the harvesting profits bin, he/she will be a line on a computer ledger and all expenses associated with the author’s books will be cut to bare minimums.

Circling back to Barnes & Noble, PG’s assessment is that the company is coasting along, riding modest waves of print customers who are coming to Barnes & Noble as more and more meatspace retail outlets for physical books disappear. PG reads some of the transcripts of quarterly earnings calls for BN and has observed the quality of top management decline under the revolving-door CEO direction of Mr. Riggio. PG suggests that it is unlikely for any salvational innovation to appear from this group of employees.

In PG’s earnestly humble opinion, Barnes & Noble will either collapse a la Borders or transition into the hands of financial types who deal in distressed businesses a la Sears.

Big Publishing, Disruptive Innovation, Mike Shatzkin, PG's Thoughts (such as they are)

14 Comments to “Stability in the book marketplace does not mean commercial publishers continue to maintain their share”

  1. Publishers are currently managing the decline, and there is still lots of money in that. Their objective is to get as much cash as they can for as long as they can.

    But, they know the time will come when there isn’t much more they can get. Then the people skilled at managing the decline turn it over to the guys skilled in salvage operations. There’s a lot of money in that, too. Assets will not be wasted.

    Both of these groups have their own objectives, and they aren’t the objectives many authors and industry observers chose for them.

  2. Great stuff, PG. Can’t see much in your opinion I disagree with. Thanks for laying it out so clearly.

  3. You paint a grim picture for traditional publishing, but I can’t argue with it. I wonder if most of the star print authors will set up their own online boutiques. Nice to see the old K&B bookstores mentioned; the flagship location on Wabash Avenue is still my all-time favorite bookstore.

  4. All that intellectual property just sitting there. And it’s so long lasting. Isn’t Mickey going pd soon if nothing is done. And Disney has just become even more powerful. Will they be trying for yet another copyright extension?

    As has been suggested here in the past, one business model is to close just about everything up and live off the royalties.

    • I certainly support protection of authors’ rights under copyright and other laws, Darryl.

      However, the length of time for such protection brings complications that aren’t present in other contracts. A typical publishing contract will be in effect for many years after everyone who was involved in negotiating the contract is dead and the owner of the publisher’s contractual rights is unknown.

    • I foresee a frightening scenario. As the Manhattan publishing houses become financially weak, Disney buys them — in or out of bankruptcy — to get cheap access to all the film rights those publishers hold. If in bankruptcy, the film assets are the only things they need buy.

  5. It is probably true that book publishers have adapted better to the rise of the Internet than any other producers of print content.
    This, however, is not exactly a high bar to set, and serves as an indictment of the other producers more than an endorsement of publishers.

    • This has to do with the fact that the subjects of most books don’t suffer from the immediacy bias of the internet.

    • It is probably true that book publishers have adapted better to the rise of the Internet than any other producers of print content.

      I suspect their adaptation is an acceptance that their fiction business will soon sunset. Cut costs, drop midlist, cut advances, layoffs, concentration on the most successful authors…

  6. The only thing stable about the qig5 is that they’ll sell more books if Amazon discounts them more – and they make less when Amazon doesn’t. (If I were them I’d worry that I’m not on the mark on my prices …)

  7. > Romance authors have traditionally been treated in a disrespectful and condescending manner by a great many mainstream publishers

    Someone always has to be at the bottom of the heap. Half a century ago, academia and the publishing industry were nearly united in their shock and horror at Mickey Spillane and the working-class mouth-breathers who bought his “murder porn.”

    Spillane’s readers didn’t care, and I’m sure if Spillane felt slighted at his rejection, sleeping on big piles of money soothed his feelings.

    I never quite understood the animosity toward Spillane in particular; having read a modest amount of 1930s-1940s detective fiction, Spillane wasn’t noticeably different than most of his competition.

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