Cover Story - Outlook 2010: The Future of the Industry
What does it mean when a city of 230,000 loses its lone bookstore, as is happening to Laredo, Texas, in early 2010? With a world of books available to purchase online, is it merely a symbolic loss, or is there something more deep-rooted at work?
To answer that question, Thom Chambliss, executive director of the Pacific Northwest Booksellers Association, cites as an example the instance of a literary figure sitting in a matinee. According to Chambliss, on a recent edition of "The Colbert Report," poet and author Sherman Alexie spoke of having time to catch an afternoon movie while on a book tour. "He goes to movies during the day because he has nothing to do before [signing] autographs at bookstores in the evening," Chambliss says. "Newspapers and radio are not doing [interviews] anymore. There's no local outlet. We no longer have book awareness at the local level."
While there are big-box retailers selling books in Laredo, Chambliss says not to expect the next Sherman Alexie to be launched from those shelves.
"Who can sell poetry?" he asks. "If you don't have people coming into your stores and browsing, you lose an incredible amount of [book-buying customers]. In the long term, it snatches away the culture of books."
Price War Fallout
Last fall's much publicized "price wars"—when Walmart, Amazon and Target lowered prices of hardcover best-sellers to around $9 to draw shoppers—highlighted the increasing dominance of megaretailers in the book trade. In an October 2009 letter to the Department of Justice, the American Booksellers Association asked for an investigation of alleged predatory pricing tactics, warning that selling books at a loss allows a handful of retailers to win control of the market and spells disaster for independent booksellers, robbing readers of choice and "devaluing the very concept of the book."
"It's also important to note that this episode was precipitated by below-cost pricing of digital editions of new hardcover books by Amazon.com," the letter states. "We believe the loss-leader pricing of digital content also bears scrutiny."
While Amazon is notoriously close-lipped about its strategic plans, company executives have stated that it focuses on overall margins, not specific product margins. (Many have speculated that Amazon's goal in pricing digital editions below cost is to sell more Kindle e-readers, bigger-ticket items with larger profit margins.)
The upshot of this, according to many in the book trade, is a book business in the hands of those whose businesses are not built on books—retailers looking to draw consumers in to purchase clothes, toys and electronics, forcing an unsustainable model on an industry still reliant on high-cost acquisition and production processes. It leads to scenarios like that of a writer/publisher described by Chambliss, whose book on walking tours of Seattle was picked up by Costco. Thrilled, the woman printed a huge order, only to see massive, damaged returns a year later. Costco had moved on, but she couldn't—and she was driven out of business.
"I think what we are seeing is that publishers have … done a bad job controlling their content and how much it costs [to sell]," says Michael Norris, senior analyst in the book trade group at Simba Information. "A book should not be priced a certain way because of a marketing decision made at an electronic commerce giant."
Not everyone agrees that the biggest retailers are to blame for the industry's current problems. "A handful of steeply discounted best-sellers won't devalue books across the board," says Tanya Hall, business development manager at Greenleaf Book Group LLC. "There are other practices in our business that have taken us further down that road—namely the tendency for publishers to print in excessive quantities and sell off remainders/overstock for pennies on the dollar, or retailers buying bargain-priced reprint rights for product destined straight for their front-of-store discount shelves."
Linda Carlson, a marketing and media ?relations consultant for Parenting Press, believes publishers should do more to support smaller bookstores, such as run contests or offer to market on their behalf in return for guarantees of high-profile book placement. "Most people own bookstores because they like books, not because they like marketing," she notes.
"[Publishers] really weren't paying attention to who was growing in power and influence in the retail space," Norris says. "It was a huge mistake to basically treat the Costcos, Walmarts and Targets the same way they would treat an Elm Street Books. … From my chair, it does not look like they have valued the independent bookstore, which is this crucial mechanism for book discovery and reading discovery. Publishers were too quick to say, 'Oh, here comes Amazon. Let's let them take the spotlight,' or, 'Oh look, Walmart is opening another 100,200 locations this year.'"
A Coming Identity Crisis?
A worst-case scenario for publishers would be if a retailer such as Amazon, already offering the best pricing and distribution options, decides to move further into publishing, says Richard Rubin, a principal consultant with Innodata Isogen and author of a recent whitepaper on publishing strategies in the emerging e-book market.
"If Amazon opens up a formal publishing arm and says, 'We are the biggest player out there, and we will promote you,' how can [a traditional publisher] compete with that?" he asks. "They claim they don't want to get into that business, but that's not to say there might not be some alliances and joint ventures."
Rubin points to the digital-rights deal recently signed between Amazon and best-selling author Stephen Covey as an example of these partnerships emerging. "I think, ultimately, what we are going to see over the next couple of years is a lot of meshing of lines between writer, publisher and distributor."
Rubin and Norris note that publishers are beginning to respond to Amazon's increasing influence by thinking more carefully about how to manage e-book releases. Hachette Book Group, Simon & Schuster and HarperCollins Publishers recently announced they each would release the e-book versions of some new titles up to several months following the books' print releases, while Macmillan announced it will release some books in a limited-edition, enhanced e-book format featuring interviews and commentary simultaneous to the print books' release, to be replaced by a standard e-book after 90 days. Macmillan also will delay the release of some best-sellers' e-book versions.
Despite these efforts to "take a stand" against deeply discounted prices for e-books, "Market forces will ultimately determine the price, based upon the devices and the consumers," Norris says.
According to Rubin, at stake in these battles over distribution and pricing is nothing less than the publisher's role in a digital future. "Traditionally," he says, "it was, 'We give you our brand, we give you our marketing power, we promote you, we set up these tours, we get you on these talk shows.' But these days, that's not so important. These days, even writers who are working with [major publishers] have to set up Facebook accounts, they have to go on Twitter, they have to set up a blog. At the end of the day, [the publishers] are taking their typical cut … and the writers are saying, 'What's in it for me?'"
"The traditional supply chain model is blown up in the e-world," says Kelly Gallagher, vice president of publisher services at Bowker. "Back in the good, old days, you had publishers publishing books, you had retailers selling books, and you had printers printing books. Now, you have retailers and e-tailers that are device manufacturers, you've got distributors that are also content platform providers, you've got mobile companies that want a slice of the pie, and so it really causes some interesting flux in the market.
"It's kind of, I don't want to say the Wild West, but it's a whole new model that's emerging. And who knows what Google will do with their cloud," he adds.
"I really do see that we are at a huge disruption point in publishing," Rubin says. "I make an analogy to television coming out. I know that's a little grandiose, but once the technologies get there in terms of a multipurpose [e-reader] device where you can get very good, crystalline, nonglare reading quality … and couple that with functions you can get from an iPhone and all these benefits of digitization on top of that—such as portability and ease of use—it's a real game changer."
Amid all the hullabaloo about e-books—reaching an unprecedented fever pitch just before the winter holidays with the release of the Barnes & Noble's Nook and the announcement of Borders' partnership with Kobo on a new e-book store—there is the still-sobering fact that these nifty digital readers only make up about 3 percent of the total book market.
This does not mean the industrywide effects of e-books are far off, however, cautions Gallagher.
For business models still built on hardcovers and large-print-run margins, "The challenge is not when e-books become the dominant [market] share, but when they gain about 4, 5 or 6 more percentage points," he says. "Then it gets to be a really sticky situation for publishers because they're basing their margins on hardcovers, which, at this point, will [still] be their primary binding type, but they'll be printing thousands less, so the per-unit price will go up."
E-books, in other words, while potentially a "good profit center," must be evaluated in terms of the coming disruption of pricing models. "It's something all publishers will have to contend with and wade their way through," he says.
Recent data on consumer use of e-books have revealed some surprising trends, Gallagher reports. "For the first half of , what drove the growth [of e-books] was the over-55 market. We tend to think of the more mature market as less gadget-friendly or techno-friendly, but when you unpack it a little, in the first half of the year, they had the single largest percentage growth by age group."
The reason for this, he says, is the device's adjustable typeface, allowing for an instant large-print edition of any book, as well as a delivery method that meshes well with the book-club model already popular with women older than 65.
Examples like this underscore the need for publishers to understand audiences and the way they choose to interact with the new medium. (Bowker is currently working with the Book Industry Study Group on a research survey tracking consumer attitudes toward e-book reading.)
"One of the things we saw, looking at it from a research-committee standpoint, was that while publishers were scurrying to create their own e-strategies, there really was not much in the way of understanding what the consumers' e-strategy was," Gallagher says. "In this day and age, it is absolutely essential [that] you understand who your customer is before you invest significant amounts of dollars."
Don't Fear the Reader
Amid all the uncertainty surrounding e-books is a great opportunity for book publishers to reconnect with audiences, Gallagher and others say. If some are concerned that Amazon may enter the publishing business, Amazon should probably worry about the increasing number of ways publishers can bypass distribution partners to connect directly with consumers.
"It is possible for the publisher, through such things as subscriptions and price plans, to reach out directly and offer bundled content or package deals to the consumer, and this is just in the short term," Rubin says. "Who knows what's going to happen later on."
What's needed going forward, Rubin advises, is nothing less than a new conception of the role of the publisher grounded in an enhanced relationship with consumers. E-books could be the key to making this happen.
This evolution will not come without growing pains. Books have, up to this point, been spared the bleeding of commercialization (ads) into content that consumers have come to tolerate, and in some cases even embrace, in other forms of media. All this could be changing.
On-screen advertisements appearing when e-book users power up their devices may not be far off, Norris says, noting that e-book readers adapted for the PC would most likely be the first to experiment with this idea. (Some publishers have tested ad-supported models for putting book content online.) Consumers already used to small pop-up ads running during TV shows and alongside online content may not blanch at such an imposition when viewing books on computer screens.
"I really foresee a time when you will have additional monetization streams coming from e-books," Rubin says. "However distasteful it might be to some people, there are going to be ads on some of the things that you download on your device. There certainly will be more specifically targeted products."
The possibilities for a rich media approach to electronic book content are too intriguing to ignore, Rubin says.
"My daughter, ironically, was reading 'Brave New World' on her Kindle, and she was annotating all these different things," he says. "I foresee some public way of sharing that with other people who have similar annotations. With the Web 3.0 and semantic analysis that's coming out, the reader [is] going to get connected with people with very similar tastes, so the social dynamic is that much more appealing and that much more sticky. The other side of the convenience is she will probably be targeted more by advertisers, so there's monetization that comes out of that."
This type of interactivity is already starting to happen, Rubin notes, with Vooks (video e-books) and other means of synthesizing different types of media. Recent interactive activities connected to books for kids (such as Scholastic's "39 Clues" series) and adults (a GPS treasure-hunting game accompanying Brad Meltzer's novel "The Book of Lies") bring together book, Web and social activities in ways that could be taken to a new level with e-content.
"Those possibilities bring additional opportunities for micro-payments," Rubin notes. Then, there are the opportunities for disaggregation: selling chunks of XML-tagged (most likely nonfiction) content that make searches through multiple e-books a snap, allowing consumers to create their own custom products.
"I know that the largest players in the space are investing heavily, and investing at a loss, to make this happen, because they believe in the future prospects," he says. "You've got to believe there's something in it."
"The biggest offset will occur when we find new ways to monetize e-content," agrees Hall, "potentially through more advanced e-books that take full advantage of the digital medium or 'pay-to-upgrade' models that tier the pricing of content according to the depth of added benefits beyond a basic ePub conversion."
With the e-commerce market share rapidly increasing, selling in the digital realm allows for a type of "long-tail" product depth that a retail store cannot mirror, she adds. "This is where we'll find the longevity for backlist titles."
How David Killed Goliath
It truly is a brave new world—of cross-selling, bundling and smaller revenue chunks—but not one book publishers need necessarily fear. In fact, Rubin says, publishers' core competencies make them the best positioned to take advantage of these new possibilities.
"[Publishers'] core competency, if I had to break it down, is finding talent and working with that talent so that the talent respects them," he says. "Good editors can help the author hone in on the right topics and the most salable topics and really improve content."
In other words, editors and marketing teams working up front with an author to refine and repurpose content will keep publishers relevant in a world of self-publishing, author-driven/independent marketing strategies, book-at-a-time distribution and e-content.
In the end, this new world may not seem so foreign once the reality of new strategic models has been digested.
"Publishers should [not] … get hung up on trying to stall evolution," Hall says. "Plenty of publishers are worried about the publishing landscape of the future, but survival of the fittest is not about being the biggest or strongest; it's about being most able to adapt."