From veteran publishing consultant Mike Shatzkin:

The overarching theme of our upcoming Publishers Launch Conference at BookExpo America on May 29 is “scale”.

. . . .

We’re covering “scale” from many angles on May 29.

The program will kick off with a presentation from Pete McCarthy, formerly a digital marketing strategist at Random House, about moving beyond our standard understanding of “industry data” — what we learn about the industry in the aggregate from BookStats and Bowker and others — to mining and analyzing the massive amounts of public data about readers: who they are and where they are. The data we care about, and that can really help us, isn’t labeled “book publishing data” but is far more useful and actionable than much of what we try to decipher meaning from that is tagged that way.

The requirements of scale threaten to really change the business of literary agents. Since the rise of agents as intermediaries between publishers and authors in the 1950s and 1960s, it has always been possible for agents to operate as very tiny operations. Single-agent offices have never been terribly unusual, and agents could run a successful business with a handful of prosperous clients, or even just one!

. . . .

But those times are changing. The opportunities for self-publishing and the requirements for authors to be self-promoters have placed new demands on literary agency offices. It is often no longer sufficient to have knowledge of acquiring editors and what they want and a network of foreign co-agents who can help place projects in other languages and territories. Agencies large and small are adding self-publishing services, which can include capabilities as mundane as getting cover art designed and as sophisticated as distribution to a global network of ebook retailers. This adds the potential for “conflict” for the agents. In some cases, agencies have chosen a course that might present a choice for an author between a publisher’s deal and their agent’s deal.

. . . .

The ebook bestseller lists have been the evidence of strong challenges to the publishers who operate with scale on their side, as an increasing number of self-published authors have seen their work rise to the very top of the charts.

. . . .

Frankly, our view is that very few of the outside disruptors, often tech- and private equity-centric start-ups providing “solutions” to the problems as they perceive them, have gained much traction or added much value. We’ll get more perspective on that from our “business development” panel, who are the ones in their companies charged with interacting with the aspirants, but we stick to the belief that there is more to be gained by watching what the established publishing players and the biggest companies in technology are doing than in tracking the theories spawned by industry outsiders who think their insights will change our world.

But we recognize a weakness to our approach. There are some things the established players just can’t discuss. We can’t expect Random House and Penguin — or their biggest competitors — to talk about what the merger of the two biggest publishers will mean to the marketplace. We can’t expect publishers who must trade with Amazon and Barnes & Noble to discuss the impact of their unique marketplace power — one in online sales and one in brick-and-mortar — on publishers’ margins. We can’t expect agents and publishers to talk candidly about when and whether established authors might be willing to eschew their bookstore sales in favor of higher margins on their online sales through a direct tie to Amazon.

Link to the rest at The Shatzkin Files

“[W]e stick to the belief that there is more to be gained by watching what the established publishing players and the biggest companies in technology are doing than in tracking the theories spawned by industry outsiders who think their insights will change our world.”

PG says this is an interesting contrast to the tech world where smart established companies and tech investors are constantly watching what small startups are doing. You’ll recall that Facebook bought Instagram when Instagram had only a handful of employees and no revenues. Then Facebook scaled Instagram immensely.

Instagram was launched in October, 2010

Acquired by Facebook in September, 2012

When Facebook acquired Instagram, it had 30 million total users. That has grown to over 100 million active (post at least once per month) Instagram subscribers who have posted more than 4 billion photos. 40 million new photos are posted each day.

59 of the world’s top 100 brands are now on Instagram. (PG says expect them to start paying Instagram for this visibility.)

In February, 2013, Instagram’s mobile app had 3.5 million more daily users than Twitter’s official app on iPhone and Android, according to ComScore.

As of April, 2013, after being acquired by Facebook, Instagram was handling this growth with about 25 staff members.

That’s how you scale.

From publishing consultant Mike Shatzkin:

Consider this data provided by a friend who owns a pretty substantial bookstore.

Looking at the store’s records for a month, 65% of the units sold were singles: one copy of a title. Only 35% were of books that sold 2 or more. (I didn’t ask the question, but that would suggest that 80-90 percent of the titles that sold any copies sold only one.)

Then, the following month, once again 65% of the units sold were singles. But only 20-30 percent of them were the same books as had sold as singles the prior month. Upwards of 70% of them were different titles. And upwards of 70% of the ones that sold one the prior month didn’t sell at all.

To further underscore how slowly book inventory moves, another report they do shows that more than 80% of the titles in the store do not sell a single copy in any particular month. So it is no surprise that an analysis of books from a major publisher that promotes heavily showed that more than half the new titles they receive from that publisher don’t sell a single copy within a month of their arrival in the store, which would include the promotion around publication date!

. . . .

Partly because of the high cost of buying and a supporting supply chain that a book outlet requires, publishers will see shelf space for books drop faster than retail demand. (The closure of Borders, which wiped out a big portion of the shelf space, is part of what is behind the recent good sales reports from many independents.) At the same time, retailers of all things will be under increased pressure to find more sales as the Internet — often, but not always, Amazon — keeps eating into their market.

Link to the rest at The Shatzkin Files

PG was going to say what he thinks this means, but decided to see what others thought instead.

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.

From veteran publishing consultant, Mike Shatzkin:

Publishers are going to find it increasingly compelling to reconfigure their inventory of title offerings around their most current thinking about their marketplace. Both Wiley and Hyperion are moving away from a “general” trade model. They’re moving away from publishing books for which their primary revenue dependence would be on bookstores and their primary marketing dependence on the book review media.

. . . .

Hyperion is a straight trade house. Unlike Wiley, they don’t have a direct-to-user business or the big library revenue that a professional publisher does. But what Hyperion does have is a close relationship with sister companies Disney and ABC. Those relationships make possible partnerships which don’t change the sales and distribution challenge, but have a huge impact on the marketing opportunities. Hyperion is increasingly able to publish titles that have a strong public awareness component built on the back of TV or movies.

. . . .

Both Hyperion and Wiley are showing us what the publisher of the near future is going to look like. They will be more focused. They will be shedding overheads so they can expand or shrink their offerings more readily to respond to opportunities and circumstances. They will be less dependant on the trade bookstore and book review trade networks. And Hyperion’s decision says something more about the future that Wiley’s doesn’t: book publishing will increasingly be an activity operating in tandem with or in service of other objectives of the owning organization.

. . . .

There may also be a message here about the relative importance of backlist. When digital first started to happen, it seemed like the backlist might be the biggest beneficiary. After all, stores had limited shelf space and online merchants can “carry” all the books they want, particularly if there is no pre-purchased inventory required.

. . . .

But it turns out that the current state-of-the-art for merchandising and presentation of books online is not very helpful to backlist. Most retailers return a limited number of books (10 or 20) per screen to any query. Customers have limited patience for refreshing screens, so the number of titles an online purchaser “browses through” is far fewer than the number that would catch the same eyes in an equivalent amount of time in a store. This appears to be pushing sales more and more to newer books and books on bestseller lists.

Link to the rest at The Shatzkin Files

From veteran publishing consultant, Mike Shatzkin:

It has been an important tenet of my thinking about digital change in the book business to understand that books are different from other media — music, TV, movies, newspapers, magazines — as we try to anticipate the future.

. . . .

But while book publishing people tend to focus on the changes enabled by Gutenberg, Gray’s newspaper-centric view makes the high-speed rotary press, which enabled publications cheap enough to be daily purchases by masses of people, the seminal moment.

High-speed presses made all print cheap for the incremental copy. In the case of radio and televison, of course, the incremental copy is free. So all these media, as well as movies, which used scale in a slightly different way, were about amortizing the costs of content creation across “mass market” consumption.

If Karl Marx had been writing a bit later than he did, he might have seen that controlling the “means of distribution” had become as important as he saw controlling the “means of production” to be.

. . . .

And that’s what the Internet has blown up. Because now the distribution mechanism for expensive-to-create content is precisely the same as the distribution mechanism for any content. In the book business, we’ve been tracking that as “purchased in stores” (which is, in itself, expensive and pretty much restricted to expensive-to-create content) as opposed to “purchased online” (which is a channel open to all of us).

Gray calls this a change from the “mass media era” to the “infinite media era”.

. . . .

But that micro-targeting might affect newspapers and magazines and radio and TV stations far differently than it affects book publishers. And that’s because, when it comes to advertising, book publishers are, in a way, on the opposite side of the fence from these other media.

Those media don’t build an audience uniquely for every issue the way book publishers do for every new book (and that’s somewhat true even for vertical publishers). They’re trying to sell captive audiences; we in book publishing are trying to corral disparate audiences. That makes us more like the newspapers’ advertisers than like the newspapers themselves.

Link to the rest at The Shatzkin Files

From veteran publishing consultant Mike Shatzkin:

On Monday, the Wall Street Journal published a story by Jeffrey Trachtenberg quoting Barnes & Noble’s retail group CEO Mitch Klipper on the company’s plans for shrinking its store footprint over the next decade. Klipper suggested only a gentle acceleration of what has been the pace of contraction for the past couple of years far into the future.

Klipper was quoted as saying that “in 10 years”, the chain would have “450 to 500 stores”. Trachtenberg reports that the chain had 689 locations operating as of January 23.

In addition, the chain operates 674 college stores. The college stores are, along with the NOOK device, BN.com, and the ebook business, part of “NOOK Media” which took recent investment stakes from Microsoft and Pearson.

. . . .

On Tuesday, I got a call from a reporter who started out by asking me, in effect, “how will publishers manage with 200 fewer B&N stores in 10 years?”

That question jumps past what I think are the first two questions the WSJ story begs.

The first one is to please tell me how much shelf space for books will diminish, not just how many stores will be closed. The piece reports that B&N peaked with 726 stores in 2008, which means a net reduction of 37 stores in the past five years. That’s a five percent reduction in locations. But publishers know that shelf space at B&N has contracted considerably more than that, as space in the stores that used to be devoted to books now merchandises NOOK devices and a variety of non-book items.

Trachtenberg reports that sales of print books (as reported by BookScan) have declined 22% since 2008. Anecdata and intuition suggest that sales of print in stores have fallen more than that. Every time a store closes, online purchasing becomes the more convenient option left for some of its customers.

. . . .

Among the developments of the last five years has been the shuttering of Borders. That took something like 400 big competitor locations out of the market. There is no comparable subtraction of competition available in the future.

. . . .

It is clear that bookstores have an uphill battle in front of them even if we don’t know the steepness of the slope or how big the boulders rolling down on them will be. The questions that all publishers should be asking themselves now are “what are the bookstores really worth to us” and “what, if anything, can we do to bolster them financially”.

Link to the rest at The Shatzkin Files

From veteran publishing consultant Mike Shatzkin:

Barnes & Noble announced some holiday sales results this morning and they were universally disappointing.

Overall sales are down. Same-store and online sales (the year-to-year comparables) are down 8.2%, while total sales are down 10.9% (because they have closed more stores than they’ve opened.)

NOOK sales were down 12.6% for the holiday period. Digital content sales were up 13.1%, but that’s alarming too. The company has sold a lot of devices since last Christmas (I don’t know, but one would expect the number of NOOK devices in the market has gone up by more than 13.1% in the past year) and last year they reported (according to Publishers Lunch) that NOOK business rose 43% during the holidays.

But what was most attention-grabbing (to me) was that the core sales decline was attributed to “lower bookstore traffic”.

Since the results were announced this morning, I had a conversation with a journalist who pointed out that the indies (anecdotally) seem to be reporting a very good Christmas. Why would the indies be up and B&N be down, this person wondered?

. . . .

The anecdata is that a Big Six CEO told me a couple of months ago that a very major book being published by that house (certainly one of the ten most anticipated releases of 2012) was not primarily promoted at B&N because they couldn’t get the bandwidth and cooperation on the B&N side to put something together. So the book was instead primarily launched through Walmart.

The conjecture in the last post was that the independents were more focused on selling printed books than B&N was. Indies are selling Kobo readers, but I’ll bet not one of them is devoting the prime sales space and portion of the paid staff to them that B&N does to the NOOKs. They’re focused on selling books, not devices, so they’re merchandising them better.

And the insight is that B&N has converted much of its store traffic to an online customer base because of their success at selling NOOKs. Those people may not be coming back, except virtually. These results may be the evidence of that.

Link to the rest at The Shatzkin Files (note: Mike’s website was down when PG last tested it so the link might not work)

From veteran publishing consultant Mike Shatzkin:

Although “digital change in publishing” has a year that lags the calendar year and this year won’t “end” until we have a read on how post-Christmas ebook sales were affected by the new devices consumers got for Christmas, the dropping of the ball in Times Square is the signal most of us respond to when timing our look ahead.

The signals about what to expect when the “digital year” ends are mixed, but not wildly encouraging. There are anecdotal reports of strong sales by US indies selling Kobo devices and Amazon has bragged about their Kindle Fire sales. On the other hand, B&N does not seem to be meeting its targets on the digital side and we’re learning that we don’t get the ebook sales surge from replacement devices that we get when a consumer first switches over from print. Most of the devices being sold now are replacements.

. . . .

1. Overall migration of sales from print to digital will continue to slow down.

We have already seen this clearly in data that has been reported throughout 2012. After ebook share growth that was in triple digit percentages for four years (2008-2011), this year we saw that switchover slow down considerably to substantially less than a 50% increase over last year.

Although the slowdown was pretty sudden, it shouldn’t really have been that surprising. Since the ebook era began in earnest with the arrival of Kindle in November, 2007 (5 years and a few weeks ago), it has been clear that heavy readers were early adopters. Both price and convenience were drivers that made the reader of a book a week much more interested in the new way of purchasing and consuming than the reader of a few books a year.

. . . .

This does not mean the digital switchover has ended. My gut (I don’t think there’s a great empirical substitute available here) tells me that store sales for books will continue to lose ground to online (print and digital) at a rate of 5-to-10 percent a year for some years to come. But that’s a much more manageable situation than the one bookstore owners had been dealing with for the several years leading up to 2012.

This is good news for big publishers. Their model is still built around putting print on shelves and managing a marketplace that works around a publication date focus and the synchronized consumer behavior that store merchandising really stimulates. It is good news for B&N too, if they can take advantage of it.

. . . .

3. Mergers and consolidation among publishers are likely to become more common, after a long period when they haven’t been.

I have been a bit surprised about how little imagination has been evident from the kommentariat about the pending merger of Penguin and Random House. It seems like it is being viewed primarily for its cost-cutting potential (and that will be real), but I think it could actually be transformative.

I see two very big immediate wins for the combined company. They’ll be able to launch a credible general subscription, book-club-type offer using their own books exclusively (print and digital, although the big opportunity is digital). And they’ll be able to serve no-book-buyer retail accounts with a commercially-appealing selection of books working with a publisher’s full margin, not the thinner revenue available to a third party aggregator.

. . . .

4. Platforms for children’s books will become increasingly powerful gatekeepers.

Publishers discovered the power of platforms when Kindle showed them that they, not the publishers, controlled the customers and they, not the publishers, controlled the pricing. It took less than a year for Kindle to “own” enough customers that it would have been very difficult for any publisher to live without their sales, even without the leverage Amazon had as a significant customer for print.

Now we suddenly have a plethora of platforms that want to convince parents and teachers that they are where kids should be doing their reading. This is coming from the retailers: Amazon has a subscription offering for kids’ content and both Kindle and NOOK have parental control features. It is coming from the people who have been in this market all along: Storia from Scholastic and Reading Rainbow’s RRKidz. It is coming from outside enterpreneurs: Story Town and Ruckus.

Link to the rest at The Shatzkin Files

From veteran publishing consultant Mike Shatzkin:

So now in addition to the Random House and Penguin merger that is being reviewed by governments far and wide, we have the news that HarperCollins is exploring a tie-up with Simon & Schuster in a deal that hasn’t been made yet. That leaves Hachette and Macmillan, among the so-called Big Six, still on the outside as the general trade publishing behemoths rearrange themselves for whatever is the next stage of book publishing’s existence.

I am not sure we really need an “explanation” for what is the resumption of a perfectly natural phenomenon. Big publishers have been merging with each other for several decades in a process that suddenly stopped after Bertelsmann acquired Random House (to add to its holding of Bantam Doubleday Dell) in 1998.

. . . .

But consequential events always get an explanation, whether they deserve one or not, and this merger appears to many to be driven by consolidation among the retail intermediaries and the rational concern — amply documented by recent experience — that the retailers would use their leverage to press for more and more margin. This is complicated by the fact that both of the dominant retailers — Amazon in the online world and Barnes & Noble in the brick-and-mortar space — have small publishing operations of their own that are always available to put additional pressure on publishers at the originating end of the value chain.

There is an important asymmetry to take note of here. The retailers publish and are always a threat to acquire manuscripts directly and cut the publishers out but the publishers, particularly the biggest ones, don’t do retail and there is no obvious path for them to enter retailing in any significant way.

. . . .

In my opinion, the dominant position that Amazon holds in online retailing and that B&N owns in shops are impregnable on their own terms in ways that the positions of each of the big publishers are not.

. . . .

I saw recent data (sorry, can’t remember where…) suggesting that something like 38% of the book business is now done online, taking both ebooks and sales of print into account. This seems to be confirmed by a chart built on BookStats data by reporter Laura Owen of PaidContent, if you take “institutional sales” out of the equation and assume that wholesalers sold books to online and store retailers as well as libraries.

. . . .

But the one thing we know for sure is that the shift to online purchasing — while it has slowed down — will continue to progress for a long time. The increased ubiquity of devices; the always-larger selection from an online merchant; the increase in availability of appealing and useful content that is either too short or too specialized for print; the steadily increasing cost and hassle of shopping by car rather than by computer; the natural results of birth, death, and demography; and the increase in online word-of-mouth and recommendation sources are among the many factors that assure that.

. . . . 

The publishers who are merging or thinking about merging are not doing so out of immediate desperation. The financial reports we see from trade publishers are not frightening. Top line sales are challenged — there is little or no growth — but margins have been maintained through the seismic marketplace shifts of the past few years and the pace of change is slowing. So it is probably preparing for a world a few years off that drives publishers to merge today. What will that world look like?

The world of publishing we’re going to see five or ten years from now will probably look quite different. Even if store sales only decline 10% a year against the industry total, what is a 60% share today will be about a third after five years have passed and below 20% in ten. Those are sales well worth having, of course, but they’ll be a lot more expensive to get. And if I were predicting rather than just speculating, I’d expect the erosion of retail sales to be a bit faster than that.

. . . .

Right now the challenge Amazon is having is that they’re trying to publish with a grip on no more than half the market. That’s great, as far as it goes, because that’s where they have a real margin advantage when they cut the publisher out of the chain. But because there is so much Amazon fear-and-loathing around the rest of the industry, they’re not able to build out beyond their proprietary position.

. . . .

But if Amazon could reach 75% of the market — that is, if store purchasing declined below 25% of the total, which is in the cards for the next ten years — leverage would be reversed.

Link to the rest at The Shatzkin Files

As mentioned previously, Passive Guy regards Mike’s posts as reflecting the thinking of the smartest people in traditional publishing.

PG will respectfully disagree with a couple of Mike’s contentions:

1. The shift to online purchasing has slowed down, and
2. The pace of change in the book business is slowing

Disruptive change is more like a volcano than a corporate earnings statement that shows steady incremental gains.

Sometimes, there’s a big boom and waves of lava sweep into the picture, destroying whatever is in their path. At other times, the volcano goes quiet, emitting a thin stream of smoke and occasionally rumbling. Regardless of their external manifestations, however, the underlying seismic shifts continue.

Nobody really plans disruptive change. Some organizations and individuals surf the waves of disruption and others are inundated by them. (PG will stop with the mixed metaphors at this point.)

As far as indicators of change, industry sales numbers and the ebook/print composition of those numbers are produced almost exclusively by legacy publishers. The biggest force in ebooks – Amazon – doesn’t release any details. This means that indie book sales, which PG thinks are mostly ebooks, are totally off anybody’s official statistics. This is one of the seismic shifts below the surface, at least as perceived by traditional publishers.

At this point, ebook sales are heavily dependent upon ebook reader, tablet and smart phone adoption. Ebook reader and tablet sales are strongly influenced by Christmas sales. During the very busy beginning of Christmas shopping this year when online sales are already taking a big leap over last year, the Kindle Fire HD is the top-selling product on Amazon.

As has been reported by Amazon and experienced by countless indie authors, big ebook sales surges happen within the 6-8 weeks following the opening of gift packages containing ereaders and tablets.

Thus, Q3 and Q4 publishing industry sales figures will tend to show ebook sales growing less rapidly than in Q1 and Q2. The rate of sales increases may be slowing if you just look at 2012, but that’s an annual sales pattern, not a multi-year sales pattern. PG predicts another giant wave of ebook sales during Q1 and Q2 of 2013 (although he’s hearing from some indie authors that the last two weeks of sales have increased significantly over the prior 2-3 months).

As far as the big mergers are concerned, when an industry is being affected by disruptive change, the only players with a chance of surviving are those that are very agile and willing to ruthlessly close or spin off operations that lie in the volcano’s path.

The merger of two large organizations is the antithesis of agility. Management is strongly motivated to look inward because that’s where musical chairs is being played with stilettos. There will only be one Editor-in-Chief or CFO of the merged company, not two. Personal survival always takes precedence over corporate survival.

Current operations are to a great extent frozen in place while the details of the merger and the ugly internal fights go on. Indeed, the merger documents may prohibit either company from making material changes to its operations during the pendancy of the merger.

Innovative long-term strategic initiatives? Fuggedaboutit.

It’s difficult to imagine a worse position for organizations facing disruptive changes to their industry. Nobody’s paying attention to the volcano.

From veteran publishing consultant Mike Shatzkin:

I went to the In Re Books conference at New York Law School last Friday and Saturday in hopes of curing some of my ignorance about the law and publishing.

. . . .

I’m afraid my major takeaway was, once again, that the legal experts applying their antitrust theories to the industry don’t understand what they’re monkeying with or what the consequences will be of what they see as their progressive thinking. Steamrollering those luddite denizens of legacy publishing, who just provoke eye-rolling disdain by suggesting there is anything “special” about the ecosystem they’re part of and are trying to preserve, is just part of a clear-eyed understanding of the transitions caused by technology.

. . . .

[W]hat is concerning is that Amazon will restructure the pricing of books so that the profit for publishers is squeezed out, robbing us of a publishing ecosystem that invests in unwritten books tens of thousands of times a year. My argument and fear is that a restructured ecosystem will deny us books like Walter Isaacson’s Steve Jobs biography or Ron Chernow’s George Washington. Books that take years to write and require hundreds of thousands of dollars of financing to be written will never see the light of day if publishers can’t earn a profit by investing in their creation.

This is an argument and a concern which the attorneys on the platform at this conference made explicitly clear they never entertained. I don’t think the ones in the DoJ did either. Perhaps this has no bearing on the law, but I wish they’d stop trying to tell us the concerns of the industry are just the same old crap coming from a different source when they haven’t taken on board what we’re actually saying.

. . . .

The old publishing case was Bobbs-Merrill versus Straus from the first decade of the 20th century. It seems that Macy’s, the department store that sold just about everything, also sold books at at discount. Bobbs-Merrill posted a notice in its books that the retail price was set at one dollar and that selling below that price constituted a violation of copyright. The Straus brothers, who owned Macy’s, insisted on selling these books for eighty-nine cents.

Both the trade association of publishers and the trade association of booksellers supported Bobbs-Merrill’s position, but the courts did not.

. . . .

1. The trade book business is quite different from other segments of the book business and has little in common, as a business, with school or college text or academic or professional publishing. Thompson made it clear that knowing one segment doesn’t mean you know another. After two days of hearing librarians complain that publishers were dissing their “biggest customers” because of the big houses’ concerns and restrictions on ebook sales to libraries, it was good to have somebody explain that publishers were different. In fact, libraries — relatively speaking — are not very large customers for general trade book publishers.

2. Thompson also emphasized — and this was critical insight coming, as it did, from the single speaker most knowledgeable about the transition trade publishing is making from print to digital reading — that nobody knows the future course of ebook adoption. Will it remain, as it is, in the 20% range for general trade reading? Will it go to 30%? 50%? The fact that nobody knows the answer to that question means that publishers’ policies have to accommodate uncertainty about a critical component of the publishers’ future commercial reality.

A couple of other points Thompson made bear repeating. One is that he sees big Anglo-American publishers fighting off threats to their margins. But he thinks the main source of margin erosion for American publishers is the agents, who exercise their power to drive up the cost of acquisition for the most desireable books; whereas for British publishers the source of the biggest problems are the big book retailers, particularly the supermarkets. It is ironic that America’s Robinson-Patman Act, which by requiring manufacturers to offer the same terms to like customers aims to protect small merchants, is actually the shield which protects American publishers from facing ever-escalating demands for margin from their largest accounts.

Link to the rest at The Shatzkin Files

Austrian economist Joseph Schumpeter borrowed the term, “creative destruction,” to describe one of the core components of a capitalist economy. Schumpeter wrote:

Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action.

. . . .

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.

. . . .

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

. . . .

But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)–competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.

The established structures of the publishing business are undergoing creative destruction. The chief components destroying the old order are disruptive changes based upon low-cost and widely-available digital technology – personal computers to create ebooks and tablets and ereaders to read them – combined with a powerful communication medium – the internet – which makes distribution of digital goods almost cost-free and opens up opportunities for new retailers like Amazon.

The current structure of traditional publishing developed by destroying the publishing structures that preceded it – small publishers, often family-owned – which, in turn, had destroyed the publishing structures that preceded them – printers that would create books for authors for a fee. Today’s big publishing conglomerates used their superior financial strength to either drive the earlier small publishers out of business or force them to sell out. In their day, the big publishers represented a superior way of doing business, but that day is past.

In its present form, big publishing imposes a huge cost on books. Those costs are collected from two groups: 1. From readers in the form of high book prices and 2. from those people who create the books – authors – in the form of a low percentage of the sales price of the book (less an agent’s fee).

How high are those costs? The combined revenues of two large publishers that just announced a merger – Random House and Penguin - totaled nearly $4 billion last year. Of course, these were not profits. There were the costs for thousands of employees, office rent in Manhattan, London and elsewhere, warehouses, Barnes & Noble, etc., etc., but readers and authors definitely paid most of those costs.

The new model of publishing includes far lower costs. The new model allows a reader to purchase an ebook for $2.99 with the author receiving a little over $2.00 and Amazon or another etailer taking a little less than $1.00 demonstrates the benefits accruing to readers and authors from an alternative model that excludes publishers and their associated costs.

The growing number of authors moving from the old model to the new model and the steady increase in the numbers of indie authors appearing on ebook bestseller lists demonstrate that both the readers and the authors appear to be satisfied with the new model.

Mike says, “My argument and fear is that a restructured ecosystem will deny us books like Walter Isaacson’s Steve Jobs biography or Ron Chernow’s George Washington.” PG respectfully replies that great biographies and great histories and great novels were written long before the advent of the media conglomerate model of publishing and will continue to be written and read after the last big publisher disappears behind a cloud of bankruptcy filings.

The only essential components for great books are great authors and readers who appreciate what great authors write. Everything else is just whatever the current method of connecting authors with readers happens to be.