First Madonna and Radiohead; Next, James Patterson: Part 2

First Madonna and Radiohead; Next, James Patterson:  Part 2 by bestselling thriller author, Barry Eisler.

In Part 1 of this article, I argued that distribution is flattening, and in doing so is undermining the most important competitive advantage of media companies.  This time, I'd like to examine the impact of flattening distribution specifically on the book biz.

Let's start by breaking down the whole book business ecosystem.  Who are the players?  What are their functions?  What does it take to get a book into the hands of a reader?

First, obviously, you need the book.  To get a book, you need a writer (good news for writers:  we're not replaceable).  Once the manuscript is written, it needs to be edited (agents do some of this, some is done by editors).  An agent brokers the sale of the manuscript  to a publisher.  The manuscript will need further editing and then copyediting.  It needs a title, cover art, and jacket copy (the package).  It needs to be printed and bound (only now is it a "book").  It needs to be marketed and sold to resellers (bookstores and other retail sales outlets).  It needs to be shipped.  It needs to be marketed and sold to consumers.

So the functions in today's book biz are:

1.  Writing
2.  Agenting
3.  Editing
4.  Copyediting
5.  Book packaging
6.  Printing and binding
7.  Marketing (to retailers)
8.  Sales (to retailers)
9.  Distribution
10.  Marketing (to consumers)
11.  Sales (to consumers)

Overgeneralizing slightly, note that today, functions 3-10 are concentrated in the hands of publishers (although publishers  increasingly outsource many of these functions, a point we'll return to in a moment).

Now imagine a book ecosystem in which resellers no longer needed publishers for distribution.  In which, for example, Barnes & Noble, has installed a POD station in every one of its stores, so that books are now distributed electronically and printed on the spot.  How would such an ecosystem differ from the one we're living in today?

Freed of distribution dependence, B&N would quickly realize it no longer needed the publisher's sales force, either.  Today, the function of a publisher's sales force is largely to excite retailers to buy lots of copies of certain books.  The pitch is:  "We love X Title, which as you can see has a full two-page spread in our spring catalogue, and we're putting a major, six-figure marketing campaign behind it.  Based on the quality of the book and our marketing efforts to consumers, it will sell strongly, so you should buy and stock it in quantity."

In the flat distribution future, B&N will respond, "Glad you love the book -- we'll check it out.  And glad to know you're going to market it aggressively to consumers.  But we don't need to buy it in quantity, or in any quantity at all, in fact, because with our POD stations, we'll just keep a couple copies on the shelf and print them out locally based on demand."

B&N will then think, "Hmmmm, if I no longer need the publisher for distribution, and I don't need their sales force, what about the marketing to consumers part?  I'm already doing a lot of that myself.  Some of it, like coop, is subsidized by the publisher, but what's to stop me from doing it all and eliminating the middleman?"

There's more.  The chief advantage B&N, Borders, and other chain stores have over the independents, and the advantage Wal-Mart and other so-called big box retailers have over the chains, is lower prices.  Lower prices are a function of volume.  Volume is a function of distribution.  In a flat distribution world, it doesn't matter whether you move 100 copies of a title, or only one.  Your distribution costs are the same.

In other words, flat distribution will de-emphasize price (that is, discounting) as a means of competition among retailers.  It will even de-emphasize the role of selection -- because digital delivery means all titles will be equally available, whether at a corner independent or a three-storied superstore (but see the discussion of exclusive publishing deals in Part 3).  Flat distribution will therefore force retailers to compete in other ways -- customer relationships, for example, and expertise and service.  Good news so far for independents... but on the other hand, a small independent will still need to sell books for a profit, because books are the store's only source of profit.  Wal-Mart can choose to sell books (or anything else) as a loss lead to pull in customers for its other, profitable items.  It'll be interesting to see how flat distribution affects online retailers like Amazon.  On the one hand, Amazon's bulk distribution advantage goes away while its distribution-to-consumer cost remains.  On the other hand, Amazon's distribution-to-consumer cost hasn't proven to be a problem for the company thus far.  But either way, Amazon's massive selection advantage will disappear entirely (subject to those exclusive publishing deals again, discussed in Part 3).

So booksellers realize they no longer need publishers for functions 7 through 9, and that they can eliminate the middleman for function 9.  What about 3-6?  Publishers are increasingly outsourcing these functions even today; what's to stop an ambitious bookseller from eliminating the middleman there, too?

Nothing.  In fact, it's already happening.  B&N and Borders both publish their own books.  True, the titles in question are mostly self-help, public domain, and other perennially-selling categories.  But in June, Borders published Slip and Fall, a hardback novel by Nick Santora that's available nowhere else.  Slip and Fall is a classic case of middleman elimination.  I don't know the financial details, but I know the dynamic that drove the deal:  Santora gets to keep more than the 15% of the price of each book he would have received from a traditional publisher, and Borders keeps more than the 40% it would have kept after paying a traditional publisher 60% of the retail price.  In other words, the 45% of the retail price publishers keep today leaves a lot of room for parties like Santora and Borders to settle on a different split -- somewhere between 15% for the writer and 40% for the retailer.  A good deal for them (if the book succeeds, of course); a shutout for traditional publishers.

If Slip and Fall succeeds, the model will become more widespread.  And here's where what Madonna and Radiohead are to changes in the music biz, James Patterson represents to book publishing.  That and more, in Part 3.

Comments

[Donna]

But what about the all-important #10 -- marketing to consumers?

The book chain and the author split a larger amount of the profit because they have eliminated the publisher (middle man). So does that mean the author can sell fewer books and still be successful? Because it doesn't cost chains or independent booksellers anything to keep an author's work available in a POD station, does that mean the author has more of a chance to build an audience by word of mouth recommendations from satisfied readers?

Also, right now publishers push only a small percentage of their books, the ones they think are going to appeal to the broadest range of readers. So many authors linger in limbo, doing so-so sales with little support from their publishers.

How would new authors or authors trying to increase their sales work within the new system? Stephen King and James Patterson would continue to sell mega books under either system, but how would new authors jump off the shelves?

[Rob in Denver]

Great series so far!

I think where the model for SLIP AND FALL breaks down, though, is in what consumers pay for the book.

So what if Borders and Santora take a bigger share of the pie after eliminating the middleman? The full $25 retail price ($19 sale price) is roughly the same as what it'd be had an established house been involved. (Before I get slapped around for speaking blasphemy, I'm just playing Devil's, er, consumer's advocate here. I'm all in favor of writers making more money.)

Do no scenarios exist where Borders and the writer get more than they would with traditional publishing and still be able to offer a more attractive price to consumers?

[Leila]

Very interesting. Glad I'm a writer and not a publisher.

Thanks again Barry.

[Personanondata]

The 'success of Slip and Fall' has more to do with consumers entering Border's with no clue what they are going to purchase (and research bares this out) than it does with a new found business model. In fact, as seller of anything I want to be in as many appropriate retail outlets as possible and while it may be seductive to have an exclusive with B&N or Walmart ultimately I believe revenues will be lower than if the product is distributed to the largest number of outlets. Border's also sold that book by 'A-listing' its merchandising with in-store events, front of store displays, discounts, etc. In the process they not only for-go publisher paid merchandising revenues but that type of activity can only be done sparingly otherwise it creates too much noise for consumers. In other words if they extend their publishing program for first run titles to say 10/quarter (which isn't a lot) how will they find the space to merchandise them in the stores? And remember they have a much bigger financial stake in these titles - author advance, printing, can't return them, warehousing, etc. than if they bought them from the publisher.

Ultimately, you will see some major name authors experiment with direct to consumer but it will not represent a big trend.

Lastly, admittedly we haven't seen a huge amount of dynamism from mainstream publishers but I do think you treat them as too static relative to the change going on around them. I do believe publishers will react faster and in (perhaps) revolutionary ways but I can understand your skeptiscm