How the DoJ's misunderstandings could destroy publishing, and why it's worth saving

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Mike Shatzkin 
The Idea Logical Company, Inc. 
9 July 2012
GW Conference on Ethics and Publishing
George Washington University, Washington, D.C.

Published in: Business, Education
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How the DoJ's misunderstandings could destroy publishing, and why it's worth saving

  1. 1. HOW THE DOJS MISUNDERSTANDINGS COULD DESTROY PUBLISHING, AND WHY ITS WORTH SAVING Mike Shatzkin The Idea Logical Company, Inc. 9 July 2012 GW Conference on Ethics and Publishing George Washington University, Washington, D.C.TheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  2. 2. Stipulations • I hate what DoJ is doing to my industry, but Im definitely voting for Obama • I hate what Amazon is doing to my industry, but I dont think theyre evil • I believe all people and entities tend to act in their own perceived self-interest • It is silly to expect them to do otherwiseTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  3. 3. Amazon and Apple and Google are much bigger than the book business • They dont really think about it much • They have other priorities • But only Amazon is in a position to destroy the value weve always reaped from itTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  4. 4. What publishers do• Refine and improve intellectual property (editing)• Craft it as a professional presentation• Position it within the ecosystem (marketing)• Deliver it (files or physical production, etc.)• Promote it• Sell rights• Manage permissionsTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  5. 5. Notice how little of that is affected by the costs of printing and distributionTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  6. 6. What publishers do• Refine and improve intellectual property (editing)• Craft it as a professional presentation• Position it within the ecosystem (marketing)• Deliver it (files or physical production, etc.)• Promote it• Sell rights• Manage permissionsTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  7. 7. But the most important things that publishers do? • Make choices (public sees curation) • Transfer risk (assume costs and pay advances)TheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  8. 8. Each book is a component of a publishers portfolio • Per title revenue might be forecast as low as $100,000 (or lower...) • Each book has a contract • No matter what the advance, each book constitutes risk for the publisher • Each book is a little businessTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  9. 9. Deciding to publish is an investment decision • Authors live on those investments • Many books are made possible by those investments • Risk: committing money to something often not yet even written • Reward: an opportunity to manage revenues of a copyright-protected propertyTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  10. 10. In US consumer books • Big Six publishers do, on average, 3000+ titles each per year. • Next 10 average perhaps 5-700 titles each per year. • 20-25,000 investments among top 16 publishers • Hundreds of other publishers, including university presses, doing the same thingTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  11. 11. Remarkable engine of democracy • Each acquiring editor does 10-15 books per year • It is difficult to micro-manage so much granularity • Editors hired for taste and judgment; expected to exercise it • Very long evaluation cycle for editors • Agents learn to understand what houses want strategically, each editors tasteTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  12. 12. What agents do • Find the diamonds (people who can really write) in the dirt • Guide crafting of comprehensible proposals • Matchmake projects with editors • Negotiate a very complex business (so many editors) • Negotiate a very complex agreementTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  13. 13. So many small-value deals require standardization • Boiler-plate contracts • Customized within agency-publisher relationships • Extremely complex royalty accounting • Trust and communication become paramountTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  14. 14. Summary • Publishing transfers risk from author to publisher 10s of thousands of times each year • Publishing finances expensive projects (Steve Jobs bio by Walter Isaacson) • Made possible by copyright-protected revenue • Publishing has evolved an extraordinarily decentralized, complex, democratized industryTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  15. 15. The World Before the Revolution • "We Put Books on Shelves" • Distribution was the key bottleneck; therefore the key competency • Intermediaries required for efficiency: retailers and wholesalers • Trade publishing thrived on leverage rather than direct customer contactTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  16. 16. The Quick Story of Amazons Success • The whole catalog including out of print • Use of Ingram and B&T for operations and cash flow • Promise dates, pricing, operational excellence • Relentless customer focus • Leveraging infrastructure: other businesses, other retail opportunitiesTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  17. 17. Domination of online book sales didnt really seem to matter • Killed I2S2 with pricing • B&Ns false starts, Borders tactical error, slow initial growth • Natural growth of online sales, superior channel for some kinds of titles • Academic felt the changes as early as 2002 • Vicious cycle: bookstores decline, more online purchasing, more bookstore declineTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  18. 18. Then came ebooks • Started for me in 1999, but just didnt take with most people • Klunky technology, poor title selection no merchandising • Kindle started a revolutionTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  19. 19. Why Kindle worked • Direct to device, lots of titles, Amazon promotion hit core readers • By 2007, Amazon had the attention of a lot of big readers • Title discounting: not really noticed at first, high device price (like a book club) • Led to market share dominance • Great reach to power online book buyersTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  20. 20. What publishers faced during 2009, before Nook • Two parts of the business growing: online print and ebooks • Amazon with shares over 75%, perhaps 90%, of each • Borders on the rocks, B&N aching • Amazon established as a very unsentimental trading partner • Amazon opening up high-royalty self-publishing and signing authors • Amazon consistently pricing best ebooks well belowThe costIdea Logical Company © 2012 The Idea Logical Company, Inc.
  21. 21. White knights on the scene • Nook launching in late 2009 • Apple bringing on new device (iPad) April 2010 • Google announcing big plans (which turned out to be a disappointment) • Hachette goes to DC (Auletta)TheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  22. 22. Action was required • Organize Bookish (US) and Anobii (UK) • Move to Agency pricing • Apple required it; B&N wanted it • Logic compelled itTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  23. 23. Growing realizations • Publisher-retailer distinction altered by the Internet • Publishers direct network must include consumers • Amazon can become a publisher more easily than a publisher can become a retailer • But Amazon hit limitations (HarcourtThe attempt, B&N and indie response)Idea Logical Company © 2012 The Idea Logical Company, Inc.
  24. 24. What Agency does • Publisher is “seller”; retailer is “sales agent” • Price is established by publisher, not retailer, is therefore uniform • Allows publisher to manage price to maximize revenue (moves up and down) • Removes price as a distinction among retailers • Price competition continues but betweenThe titles, just not for the same titleIdea Logical Company © 2012 The Idea Logical Company, Inc.
  25. 25. The impact since Agency • Amazons share of ebooks in US dropped from about 90% to about 55% • B&Ns Nook established; also iPad and iPhone • Innovation and price reduction of devices • Simon Lipskars analysis: overall reduction of ebook prices • B&N brief says: overall reduction of print book prices • In other words: negative consumer effect is, at the very least, arguableTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  26. 26. But still • Amazons share of publishers’ revenue keeps rising • Now larger than any account in history • Amazon continues to be each publishers “fastest growing account” • And the others fight to stay evenTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  27. 27. The nightmare for publishers (and for all of us) • Amazon hits 50% of publishers’ revenue • Says to biggest authors: well triple your take, ignore the rest • Publishers lose big revenue sources, other retailers lose high-value productTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  28. 28. What happens then • No other general book retailer can survive (print will be interesting...) • Publishing as an industry becomes captive to a single retailer • Fiction remains robust, but new talent breakthroughs are rarer • High-cost high-value non-fiction (Steve Jobs) ceases to be publishedTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  29. 29. Why what the DoJ is doing is so wrong-headed • The effect is to strengthen the strongest player, and the only one that can gain monopoly • Driving down pricing per title prices out publishers services and profits • Driving down pricing per title prices out investment in books that require itTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  30. 30. The settlement is a "tilt" to Amazon • Enables pricing as a weapon • Further constrains publishers from going direct • Weakens all retailing competition • Hastens demise of brick-and-mortar, and, therefore, printTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  31. 31. The trade were making Hundreds of companies, thousands of editors commissioning for commercial payback for… One company dominating ecosystem, signing what it wants to own more ofTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  32. 32. The trade were making Publishers serving authors by gaining the widest possible distribution for their work for… The only viable publisher trying to maximize value for a single retailerTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  33. 33. This is not an easy challenge • The natural forces tilt to Amazon as we move to a digital and online world • Amazons execution is excellent; their qualitative advantages are real • Even with Agency, the nightmare scenario could developTheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  34. 34. But why should our government be pushing us toward monopoly, not away from it?TheIdea Logical Company © 2012 The Idea Logical Company, Inc.
  35. 35. Mike Shatzkin mike@idealog.com @MikeShatzkinTheIdea Logical Company © 2012 The Idea Logical Company, Inc.

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