Part Two: Who's on Top?

Last time, I presented a typical response by print publishing toward the perceived encroaching electronic threat. One part denial, one part appeal to the physical book's nostalgic properties, and one part devaluing the potential of electronic mediums - the last thing print publishers, and print consumers for that matter, seem to want to admit is that the world may one day cease to produce books as we've come to love them on any significant scale. This time, I am going to discuss who's on top, and I don't mean who's going to end up on top in the battle between print and electronic. Rather, I'm referring to who is running the publishing show in its current state.

Electronic possibilities have only been acted upon in the last two or three years at the large publishing companies' executive level. There are likely several reasons for the shifting ideology, but a big one is attributed to the sales figures, particularly long-term sales projections, coming in. Whether the sales reports reflect new profits in the electronic realm or dwindling profits in the print realm, the evidence is clear that the issue needs to be addressed and strategy adjusted.

Picture, if you will, the CEO of a large publishing company watching the unfolding realities affect his bottom line. Our CEO attained the position at the relatively young age of 55 and now he's less than ten years away from retirement. Realizing that the print industry is ingrained into society - an industry that supports thousands of jobs from the bestselling author who pens the book to the operator who runs the press to the driver who delivers the book to the logger who cuts down the trees that make the pulp - the CEO understands that the industry's stubbornness and inertia will not allow for an overnight transition, too many people have a stake in it, and demand for print books isn't disappearing.

Anyone that's done some research on publishing a manuscript has heard the figures suggesting less than one tenth of one percent of all submitted manuscripts get published (excluding self-publishing, both in print and online). A lesser known statistic, but one that speaks volumes about the current state of publishing, is summed up on wikipedia:

In the U.S., the five major publishers--Random House, HarperCollins, Time Warner Publishing, Penguin USA, and Simon & Schuster--are responsible for about 80% of bestsellers; the five majors together with the next five largest publishers--Macmillan, Hyperion, Rodale Press, Houghton Mifflin, and Harlequin Enterprises--control around 98% of all United States bestsellers.

Keep in mind the 98% figure is only for bestsellers and many small publishers exist, publishing thousands of smaller market books (about 200,000 books are published yearly in America). Though any trade author, whether they admit it or not, wants to have his or her book reach bestseller status. In order to do so, an author needs a publisher with the resources to mount an advertising campaign, but most importantly, a publisher that has the leverage to get front product placement in book stores and attention in media outlets, which explains how the top ten publishers have managed to keep their virtual monopoly on bestselling status. An oversimplified crunching of the numbers demonstrates that if only 1% of 200,000 books reaches bestseller status annually - 2000 books, and only 2% of those 2000 books are not published by the Big Ten publishers that means that roughly 40 books a year Not published by the Big Ten achieve best seller status. For those 40 books it takes an anomaly such as unexpected media attention, a recommendation by an established author, Oprah's book club, an appearance by the author on the Daily Show, an award win/nomination etc. to gain enough clout to make their way onto front placement at bookstores.

Big Ten acquisition editors have a monthly quota for books signed that they must meet, and they often receive bonuses for exceeding their quota. Clearly this is a quantity over quality approach, and it exists for good reason. When a company has the resources and connections to manipulate a book's exposure, they can easily throw their support behind a book that, for whatever myriad reasons, experiences a surge in popularity. Small publishers, however, take the opposite approach by investing great care in selecting manuscripts and funneling all their resources behind a handful of books in hopes that one might take off.

A UCLA physicist, Didier Sornette, actually created a formula to predict a book's success. The study indentifies two paths to success, the exogenous shock, a "brief and abrupt" rise to the top which is usually characterized by an equally abrupt fall in sales, and the endogenous shock, a longer accelerating trend, which takes more time to reach bestseller status but when it does it sustains the position and sales numbers for an extended run. The study finds that word-of-mouth is the greatest contributor to the endogenous shock. Tucker Max's IHTSBIH is a perfect example.

Going back to our 55 year old publishing CEO, let's say he consults his Board of Directors, which also consists mostly of 50 or 60-something executives. What is their long-term strategy going to be? If you'll excuse the hasty generalization, it is likely that the directors of this Big Ten publishing company are not going to want to modify their existing formula. For them long-term means another decade or so in the business. Envisioning the future of publishing with a ten year cap makes embracing electronic publishing - a move that would require a massive overhaul not only in infrastructure but also in the corporate mindset right down to its DNA - appear unfavorable. The Big Ten are so firmly entrenched in the book selling market that they do not need the further advantages that electronic publishing might bring. It is from such a mindset that the defensive reaction by print powerhouses toward e-books is derived.

Yet, if we imagine a world where the nationwide coordination of front placement in bookstores is not crucial to a book's success, it makes for a much more even playing field. The dawn of the electronic publishing era also paves the way for smaller forward-thinking publishers to adjust their strategies and aim to break the stranglehold held by the Big Ten.

Perhaps the most notable endeavor into electronic publishing is HarperCollins' (a top 5 publisher) HarperStudio branch. HarperStudio marks the first serious effort by a big publisher to capitalize on the electronic medium. Furthermore, they are restructuring the standard author contract. A conventional publishing contract for a book has a large (relative to the project's anticipated success) advance followed by 10-15% royalties on the backend that decrease to 6-8% when the book is reprinted in paperback. Instead HarperStudio offers authors little to no signing bonus - capping it at $100,000 which seems like a lot, but considering Jerry Seinfeld's forthcoming book was signed for several millions in advance, it's peanuts for a notable personality - with the promise of 50% of royalties on the backend. This formula might sound familiar to faithful Rudius followers.

Harperstudio has a popular blog at the26thstory.com. The blog's name was derived from HarperStudios occupation of the 26th floor of HarperCollins head office building in New York with floors 1-22 occupied by the rest of HarperCollins. In other words, HarperCollins has allocated about 4% of its space to the effort, not a meaningful statistic in any empirical way, except to point out how willing these large publishers are to invest in the unproven electronic market.

If I found myself at the helm of a Big Ten publisher, I would invest a minimum of 20% of my resources into the electronic market. I like what HarperStudios is doing and praise Bob Miller for his ideas. Aside from embracing the electronic format and restructuring contracts, he also wants to eliminate returns, which are a problem that plagues publishers. Without boring you with the details, it boils down to book sellers not having any responsibility for the number of copies they order because they can send them back to publishers for a full refund. As a result, around 30-40% of trade books end up being mashed into pulp creating a massive, unnecessary expense that hurts publishers' bottom line and drives up prices for consumers.

The criticism I have of 26th Floor is that their definition of innovation is plugging old methods into new equations. Sure, they have some new creative approaches to existing problems, but what's needed - and what I believe will truly shake up the industry - is an approach catered from the ground up to exploit the best aspects of the print and electronic markets. It isn't feasible to embark a true combined effort within the framework of a Big Ten publisher. The thought-processes is corrupt right down to the DNA, from how books are acquired to how and to whom those books are marketed.

So, if I'm casting stones, shouldn't I toss out some ideas as to how I think the new industry should be approached? Yes, and I intended to do just that in the next part, starting with a focus on strategies and technologies that the publishers should use. Next, I'll examine the industry at the consumer level, and the potential opportunities I see there.

In the meantime, I'll leave you with a classic example of the type of innovated thought this industry needs. Dildo books.

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Posted by Chris Griffin at 9:18 AM

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