From veteran publishing consultant Mike Shatzkin:
My brilliant friend Joe Esposito has written a piece to explain why Penguin Random House would want to acquire Simon & Schuster. I have also been thinking about why PRH, or any of the other three of the “Big Five”, would want to acquire S&S. In fact, two of the three, Hachette and HarperCollins, have indicated interest. Only Macmillan, which coincidentally or not just saw the resignation of its CEO, John Sargent, among the other four of the Big Five, is not on record as pursuing a purchase.
Here’s a snapshot of my view of the world of big consumer publishers and how it has changed over the past three decades, which informs my explanation of why PRH would want to buy S&S.
Big consumer publishers are called “trade publishers” because they have historically sold the vast preponderance of their units through “the trade”, the network of bookstores and libraries and their wholesalers that has grown up in the US over the past century. As the role and importance of bookstores in the overall distribution world of books has changed, so has the commercial reality for publishers.
In 1990, there were about 500,000 individual book titles to choose from because only what was in “books in print” was really available. There were, at that time, dozens, perhaps even hundreds, of stores in the country that carried 100,000 titles or more. Trade publishers who depended on that bookstore network and worked it regularly with two or three “lists” a year could almost always put out a few thousand copies of any book on their list through that bookstore network. Each new book published was competing with half-a-million others in the market, and the publishers were insulated from competition from any entity that didn’t cover the bookstores regularly the way they did.
The result of this was that most publishers made a little money on most of the books they published, unless they very much overpaid on the author advance or printed many more copies than they distributed. Publisher accounting obscured that fact, because almost all publishers did “title P&Ls” based on “unit cost accounting” which insisted that each unit sold carry its share of the publisher’s overhead, which was deemed to be 22 to 30 percent of the revenue, or even more.
This practice was nearly universal and based on fallacious logic. In fact, a publisher’s rent, warehouse costs, sales force costs, and office overheads did not go up or down with each book sold. They were fixed, or nearly fixed. Each title contributed margin if it brought in more dollars than it cost to originate and print, and all the margin from all the books contributed to retire overhead and then, when it was covered, constituted profit.
The point is that individual titles, let alone individual books sold, did not make profits and losses. Titles either contributed margin or they didn’t. The company made a profit or a loss.
. . . .
We’re in a different world today. The universe of possible titles now is about 18 million unique possibilities, or about 35 to 40 times more titles competing with each new book for attention and sales than existed three decades ago. (And all of those 18 million books, most of which live today as files ready to be printed-on-demand, are available in a day or two from Ingram.) Bookstores today are perhaps 25 percent of sales, so having a strong position with them only commands a fraction of the market. The stores are smaller in number and smaller in footprint; very few stores today carry more than 35-40,000 titles.
So publishers can’t make it on bookstores alone; very few titles, let alone whole lists, can. And for the sales made online, through book channels like Amazon or through specialty subject-specific marketing efforts a publisher might discover or construct, the publishers often don’t have the “insulation” that keeps a lot of competition out.
The net result of this is that publishers no longer are pretty much assured of positive margin on any book they publish. It isn’t just misleading accounting that is making them fearful of the commercial result of publishing speculatively; it is a fact that it is harder and harder to make money publishing a new book.
Big publishers (and Ingram, which is not a publisher but provides the full range of services and a shared infrastructure to 600 distributed publishers, making them collectively as big as most of the Big Five) have long recognized this market shift. They have been building “direct” sales efforts, including creating vertical websites, compiling email lists of book consumers, and “working” the Internet for sales and marketing opportunities, for well over a decade.
. . . .
But the big problem for the publishers is that backlist inexorably “decays” in sales power year by year. Titles, particularly non-fiction, become dated. This was not so noticeable in the days when new title publishing was profitable and added new blood to the backlist every season. But it must be increasingly noticeable in a time when new title production in many houses is being reduced and a smaller percentage of what is launched survives to become backlist.
Meanwhile, the big publishers are building sales capabilities through online channels, often topic- or audience-specific, that are wasted assets unless there is a flow of books new to those audiences to feed them. Penguin Random House has been very aggressive at building their digital marketing capabilities. That means they can sell more copies of many titles than anybody else can; they have more places to push and put them.
And all of that is why Penguin Random House could benefit a great deal from acquiring Simon & Schuster. They would get tens of thousands of commercially viable titles to push through channels they have that S&S did not.
. . . .
General trade publishing will be soon be recognized as an artifact of a trade that no longer exists. It doesn’t make sense any more for the organizing principle for title acquisition and marketing to be “if it works in bookstores, and we are confident we can convince them it will, we can do it”. That was the general trade that the general trade publisher served. As the trade shrinks, so does the universe of general trade publishers.
Book publishing is not going to stop, or even slow down. Individual authors, purpose-driven publishers, and many organizations (including schools) that see books as useful to their mission, will keep pushing new titles into the marketplace.
. . . .
The books will still be there. All the ones from the past will still be available and there will be a steady flow of new ones every day. What will be different is that most of the books sold won’t go through bookstores, and diminishing shares of the book sales will go to “frontlist” rather than “backlist” or to “commercial publishers” rather than self-publishers, upstarts, or not-publishers doing books anyway. In any case, “general trade” is not a term that is likely to make much sense to anybody ten years from now. That’s a big change.
Link to the rest at The Shatzkin Files
PG wonders who’s going to end up owning the rights to the copyrights of all the traditionally-published books.
The large majority of these copyrights are tied up with the publisher for the full term of the copyright – the rest of the author’s life plus 70 years in the US and similar lengths of time in other countries.
Ownership of these contract rights will be owned by someone. If the publisher disappears as a commercial entity, someone else will own the publishing contracts.
A traditionally-published author might well ask, “Who owns my book now? Will they still pay royalties? Who do I sue if the owner stops? Will the owner be in the United States or elsewhere?”