RicDay on Publishing

The changes we are witnessing in the book business are more than simply the result of the current recession. I think a fundamental shift was taking place before the subprime mortgage mess hit the proverbial fan.

Over the past couple of decades we have seen unprecedented consolidation in the media business. This has been going on not only in book publishing, but across the entire spectrum of media and entertainment. The consolidation has followed a predictable pattern: media conglomerates have bought business assets in order to integrate vertically and control as much of the value chain as possible.

Take Time Warner as an example. The company’s primary assets include AOL, Time Warner Cable, Home Box Office, Turner Broadcasting System, Time Inc., and Warner Brothers Entertainment. You can add to that list a large number of strategic investments in digital media properties through Time Warner Investments.

I see companies like Time Warner (and peers like Disney, Fox, News Corp., Sony, Viacom, and Vivendi) as businesses whose real mission is distribution. Yes they produce content, but the real aim is to own the marketing and distribution, and everything in between. Each of these conglomerates uses their cross-channel holdings to leverage the marketing and ultimately the distribution of the content they produce.

The result is “entertainment” manufactured to appeal to an audience which is carefully primed by the integrated companies in the group. No one in this business takes risks on quality — the aim is to control the value chain in a way that allows you to out-distribute and out-market anyone else.

It is no surprise that this approach to content results in a small number of writers dominating the best-seller lists. If a “star” author can churn out more titles faster by collaborating with another author or three (James Patterson and Tom Clancy are examples), why not? Create a TV series or two from the author’s work; make movies based on the story lines; launch themed computer video games linked to the books; build promotional websites where you can also sell knickknacks; and use your broadcast and print media outlets to maintain the hype.

Exploiting consumers

The fundamental problem with this approach is that the consumer is not being served, she is being exploited. To keep the distribution model working, you need to squeeze as much value out of each consumer as you can. Don’t innovate — innovation is risky. Just make sure you out-market and out-distribute everyone else in the game.

I think the media conglomerates initially saw the Internet as just another tool for promotion. Another locale in which the audience could be held captive and sold “the next big thing.”

But the Internet does nasty things to vertical integration. Once you start trying to market digital content on the Internet, you quickly discover that the Internet is no friend of anyone who wants to tightly manage the value chain.

Consumer Exploits

The music industry component of the media conglomerates was the first to learn that the Internet is a disruptive force. It takes real money to operate a bricks-and-mortar retail chain. Anyone can create a website and it is easy to duplicate, pirate, and separate your content from your distribution systems.

Napster demonstrated this. Consumers were not happy to pay a premium for music CDs that contained one or two tracks they wanted, and a lot of tracks they didn’t want. So consumers took things into their own hands and created a new delivery mechanism that gave them what they wanted — individual tracks. The music industry fought back, spending millions on lawyers to protect its distribution chain. It failed.

Steve Jobs saw an opportunity. The iPod portable music player gave consumers a tool with which they could organize their music the way they wanted, and take it anywhere. His iTunes store at first tried blending the “old school” mechanism of controlling distribution (via digital rights management) with the new school approach of letting the consumer select and purchase just the tunes they wanted.

DRM locked the music to specific devices — you can buy this music, but I will only let you listen to it on approved devices. Pricing was initially set so the consumer paid a premium for the option of buying single tracks. Some consumers simply broke the DRM mechanism while others continued pirating the music.

Jobs then pressured the music industry to drop DRM, and the iTunes store dropped the per-track pricing to pennies. Sales have rocketed up, because the consumer is now being served. Brick-and-mortar music retail is dying. Music distribution on manufactured media is dying. Music distribution is now all about the Internet. The entire ecosystem, built by the vertically integrated conglomerates, is unraveling because the conglomerates forgot about serving the consumer’s evolving needs and concentrated on trying to control the distribution chain.

Books at Risk

Music (and video) have been severely disrupted by the Internet. I believe that the book industry is next.

Book distribution is an inefficient mess. At the sharp end, where consumers shop, retail has consolidated down to a handful of huge mega chains where books are commodities and how often a stock keeping unit turns on the shelf in a given period of time is the sole measure of success. Turn rate not fast enough? Return the unsold copies and try something else.

Amazon and its kin had better margins to play with than the brick and mortar crowd, so they started deep-discounting everything, including the newest titles in the store. The chains responded with their own discounts. Books returned by chains are sold off for pennies to specialists who sell them back to the retail chains for deep-discounted disposal in dump bins.

Magazine and newspaper distributors sell “top ten” fiction paperbacks to grocery and drug stores. Big box membership chains like Costco and Sam’s Club load tables with top ten fiction and high-end illustrated books, selling them at around 10 percent over wholesale.

The result of all this discounting is that books are terribly devalued. Consumers are led to believe that the cover price of a book is inflated and the publisher, who printed that price on the cover, is trying to gouge them.

Piracy 101

In recent years, the prices of books prescribed by teachers in the post secondary market have inflated beyond belief. Publishers in the education market have found a nice little racket in which new editions are produced as often as possible, killing off the used book option for many students. The fundamentals of math, for example, have not changed since I was in high school 50 years ago, but new high school math textbooks re released annually. An entire generation of students is being graduated from our schools who have come to believe that publishers are rapacious swine.

The mass media is far from helpful to book publishers. When the exchange differential between the Canadian and American dollars narrowed a year ago, newspapers and magazines (and book retailers, who really should have known better) demanded that Canadian publishers cut their Canadian dollar cover prices on all books, immediately. Virtually no one noted that many of those books had been produced a year or more earlier, when manufacturing costs were relatively higher due to a weaker Canadian currency. The populist accusation was made that Canadian book publishers were somehow exploiting Canadian consumers.

All the above creates a perfect environment for book piracy. The only thing holding it back is that printed books are tough to reproduce. That will not be the case as we move to digital books.

We have comforted ourselves for a long time with the notion that people don’t like to read entire books on a computer screen. To a large degree, that is true. Traditional computer screens, both glass tube and LCD, “refresh” their images in a way that is tiring for our eyes.

Portable devices for reading e-books are now emerging from the technology world that will change the equation. Amazon’s Kindle, Sony’s evolving reader, and similar devices from other manufacturers use a screen technology that resembles paper in quality. Cellphones are evolving larger screens which make brief spells of reading quite comfortable (while commuting on public transit, for example). Even the iPod, in the Touch version, works as an e-book reader.

It is a matter of time — perhaps counted in months rather than years — before one or more e-book readers emerge that a majority of consumers will find acceptable, if not desirable.

A different generation

The millenials — people who have grown up never knowing a time when personal computers did not exist — have different reading habits from most of us who are a little older. Few of them indulge in the same sort of concentrated immersion that we enjoy when reading.

The millenials multitask. Watch them on a computer: it is quite normal to have an IM chat session active, a page on Facebook open, a Twitter session running, and a music player blasting sound through surround speakers. Doing one thing at a time is… their parents.

The millenials are comfortable reading on cellphone screens. They love handheld devices, especially ones that allow flexible use (music, web browsing, reading, text messaging).

More than one millenial, when I have argued for printed books rather than digital, has said in so many words, “look, a printed book is just one kind of container for information; I prefer a different container.”

A conclusion

I am increasingly convinced that digital books will be a very large part of the future of publishing. I do not think print will disappear (although it might, eventually). I do think the importance of print to publishing will diminish, probably quite quickly.

As publishers we need to be prepared for the changes, and to be engaged and experimenting now. We also need to remember what the music and video industries have done wrong, and not repeat their mistakes.