November 1st, 2014

The Publishing Business

Publishers exist to make money for their owners, investors, and other stakeholders. They choose to make money by creating books and selling them at a profit. Publishers talk about preserving the culture and ideals of free speech, but tell that to a private equity firm planning a leveraged buyout or a bankruptcy court.

How do they make their profits? They sell many books to many people at prices that exceed costs. People who buy books are the sole source of their profits. (I’m ignoring movie rights and the like.) The costs that reduce their profit are the costs of acquiring and grooming the book content, marketing, and printing and distribution. I include salesmen peddling books and the bookseller’s cut among distribution costs. Publishers have a hidden hole card: authors are begging to be heard. Even though authors are a crucial element in delivering the money to Wall Street, they relinquish all but the tiniest fraction of their leverage in hope of being heard.

How do these reasons for reading interact with electronic publishing? The first fact to consider is that printing and distribution costs go to near zero. Anyone can effectively print and distribute an eBook for a few dollars. Second, the Internet has added new vectors for delivering marketing: Facebook, Google AdWords and similar advertising services, blogs, and Twitter, all deliver the message, and they can be pointed at very small sectors of the population that might have special interest in a given product. And these tools are cheap, very cheap compared to a full-page color ad in the New Yorker or an ad in a few metropolitan newspapers. In other words, it takes less capital to become a publisher than to set up a storefront retail business and there is no monthly rent.

All this adds up to tremendous pressure on publishers. If they can’t tune their business model to the new reality, they are on the verge of losing it all. I don’t have a window into the minds of private equity bankers, but I am not sure I would take on Hachette at any price. The advantage publishers have now is knowledge. They know marketing, they know the kinds of books that sell, and they know how to groom a book for publication. However, they have also trimmed their own marketing and grooming budgets to the minimum because their stakeholders will not wait: they must get their profit this quarter, not next. The pressure to show a profit on a division of a conglomerate is as the pressure on a Silicon Valley startup from the venture capitalists. No wonder Hachette is bargaining hard with Amazon. Unfortunately, I doubt that Hachette will do anything but stave off the inevitable if they win.

What is the inevitable? The big publishers may not disappear, I suspect there is a business for them selling top ten bestsellers in airports, but the entire publishing industry has to change. I predict that the market will become more segmented with many successful smaller publishers who target smaller markets, defined by region and interest. These smaller publishers will concentrate on selling books in a special area in which they have expertise. A single author could publish books to a small region and still make adequate profits for the business to prosper, adjusting the scope of their specialty to match their definition of prosperity.

I look forward to that future.

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