Monday, July 21, 2014

Writers of the Future, Publishers of the Past

by Mord Fiddle
Publishers worry that a widespread shift to print on demand could, like the advent of e-books, disrupt their century-old business model.
      - Brad Stone: Business Week

A neat bit of futurist technology one sometimes finds in Science Fiction, originally popularized by Star Trek, is the replicator.  A replicator, for those of you who are more into Fantasy than Science Fiction, is a manufacturing solution that simplifies logistics and inventory management to a mind-bending degree.

Let's say, for example, that your interstellar spaceship breaks down and you need a critical part, a 'port compression coil' let's call it, to bring the spaceship back on-line.  In our present-day logistics paradigm, you'd be expected to carry a spare port compression coil around with you. After all, given that your ship cannot operate without one, the port compression coil represents a single point of failure that could leave you, your ship and your crew stranded in deep space if you can't replace it.

I mean, what kind of moron would break atmo without a backup port compression coil? 

The problem is that spare parts and any other manufactured items have mass and volume. They have to be produced in lots, distributed and then stored until the time comes to dispense or use them - all of which creates overhead costs.  If the inventory of such items runs out, anyone wanting one must wait for the next production run, or find a substitute.

On spaceships, mass and volume are at a premium. In the case of our spaceship, a non-trivial amount of its fuel, lift capacity and cargo space must be dedicated to hauling around a load of critical spare parts that, if its crew is lucky, will never have to be used while traversing the depths of interstellar space.

Our fictional replicator solves all this.  It's usually described as having a database of 'patterns'; essentially molecular blueprints for physical items like port compression coils. As long as a replicator has the pattern for a port compression coil in its database, and sufficient bulk matter available for use as an input (say, for example, a broken port compression coil), a port compression coil can be 'replicated' on site and on demand.  Equipped with a replicator, our spaceship's need to haul an inventory of spare parts (and many other supplies, such as food) is much reduced, if not eliminated, along with the financial and resource overhead that would have been spent in so doing.

The idea of the replicator suggests a possible future in which the value chain between the designer of a product and the product's consumer is profoundly shortened. Which is pretty cool in principle for most readers of Science Fiction.  

However, there is no doubt the advent of replicator technology would create financial upheaval.  Many firms are heavily invested in value chain links that would be bypassed by replicator technology, and their long-standing business models would become obsolete. Such firms would be forced to adapt their business models and change their strategic direction (or 'pivot' to use the current business jargon). Firms unable to pivot, that remained chained to the old business model despite its diminishing utility, would be living on borrowed time.

The publishing industry is having something of a replicator moment.

 Much has been written about the current negotiations between Hachette publishing and Amazon.  While there are many markets for books, Amazon is certainly the most lucrative for publishers and the most high-profile for authors. Publishers make roughly $2.50 more selling an e-book through Amazon than they do for physical books and, in the Amazon marketplace, they sell many more e-books than they would otherwise.  In contract re-negotiations Amazon is demanding a bigger share of the revenue from e-books; a share roughly equivalent to the $2.50 uplift over physical book revenue Hachette has enjoyed to date. Hachette, of course, is understandably reluctant to part with said uplift.   Both sides dug in.

The resulting spat became heated and spilled out into the public.  Many fingers have been pointed, unkind words spoken and elbows thrown.  Authors and pundits have have weighed in on both sides and the ongoing negotiations have become proxy for a bitter culture war in which bystanders are asked to choose between emerging publishing/retail technologies and the preservation of a genteel literary culture, as though this were an either/or proposition.

In the midst of all this, looming in the shadows, is Print On Demand.  With Hachette assailing Amazon as a bully and Amazon calling out Hachette as an antediluvian relic, Print on Demand (POD) has been something of an aside or foot-note in most articles.  Its presence on the table is seen largely as a negotiation tactic by Amazon.  In the midnight bedroom of publishers' imaginations, POD is the monster in the closet; the snakes under the bed.  POD, more than any other item on Amazon's wish list, is the publishing industry's primal bug-a-boo.

While hardly replicator technology,  Print On Demand (POD) does offer significant streamlining of the logistics sector in the physical/paper book (p-book) publishing business.  Rather than printing books in large lots, holding them in inventory and shipping them off to retailers, POD facilitates 'just in time' printing and shipping of books.  POD books are printed and bound on industrial printers upon order, either at a retail location or at a fulfillment center.

In many cases, POD is much more efficient and streamlined than the current business model, and would save both the book publishers and book sellers alike much of the overhead associated with shipping and managing large inventories of physical books.  According to Brad Stone at Business Week:
If print on demand became widespread, publishers could cut their fixed costs and solve the perennial problem of stores returning unsold books.
But Stone goes on to say that, while happy to use POD providers themselves when relatively small runs of books are needed, publishers regard the idea of POD in the hands of retailers and fulfillment centers, particularly Amazon, as something of an existential threat.
 But that would throw into doubt almost everything else about the way big publishers conduct business, since they’re compensated based on the range of services they provide, from editorial guidance to storage and distribution. Print-on-demand technology would make it harder for the publishers to justify keeping a large majority of a book’s wholesale price. One of the New York publishing chiefs says that even allowing titles to be printed on demand by Amazon when shortages occur is a bad idea, since it might encourage the company to order fewer printed books.   
Normally, eliminating inefficiencies is desirable for firms as it means they spend less of the revenue they generate on overhead costs.  However, in this case, the Big Five publishers seem unconvinced that this would occur. Certainly authors, retailers and the reading public would demand that some of the cost savings be passed on.  And the unnamed New York publishing chief Mr Stone references is quite correct when he says that POD is likely to result in smaller bulk orders from retailers for p-books.

However, there is no immediately evident reason that the publishers would not be able to maintain their current profit margins, assuming the larger slice of the per-p-book sale price they receive today accurately reflects the publishers' higher costs in the printing and distribution phases of the production process.  And while POD's just-in-time nature means a lower burst of revenue for the publisher after a book's initial release, it doesn't necessarily mean less money for the publisher.  It likely means that publishers will have a smoother revenue stream over time and one that is not so closely dependent on print runs.

By the same token, authors should benefit from their works' ongoing availability being decoupled from follow-on print runs and on-hand inventory.  POD would keep print versions of books active in the marketplace and generating revenue for their authors long after initial release.  Freed from the risk associated with ordering and maintaining an inventory of p-books up front, retailers would be able to sell books by a larger selection of authors, including marginal or niche authors that get limited play on bookseller's shelves in the marketplace today.

Further, the current publishing business model, which generates a large volumes of books that are never sold or read but finally returned to publishers, results in unconscionable amount of wasted energy, raw materials and labor.  In a 2008 interview with NPR, Jed Lyon, president and CEO of Rowman & Littlefield Publishing Group and the National Book Network, estimated that 25% of all printed books are returned to the publisher for credit.  While a practice this wasteful may have been acceptable during the Great Depression, it is certainly not acceptable today when technologies exist that make it largely unnecessary. 

Generally speaking, the potential benefits of POD should make it very attractive for both the publishing industry and authors.  However, retail-based POD represents significant change to a business model that has remained largely unchanged for nearly a century.  The principle strength of that business model has been one of control.  Control over the printing and distribution of physical books has traditionally provided the publishers a large degree of leverage with authors and retailers, and acted as a high barrier to the entry of new competitors.

For good or ill, that control is now threatened.  Technology has caught up with the book publishing industry. 

With e-books, of course, print runs and control of physical inventory are irrelevant.  The advent of that technology removed the print and distribution phases of the publishing production cycle from the means of production for a large part of the industry's output, along with the attendant control previously enjoyed by publishers.  While the reading public's continuing appetite for print books has kept the traditional print and distribution phases alive and under publisher control, POD threatens to put them, and with them the publishing industry's century-old business model, on life support.

Any business model that has persisted more or less unchanged for a century is living on borrowed time.  Amazon, at once the industry's savior and Great Satan, is merely the first retailer with the leverage to insist on innovations such as e-books and POD; innovations that make perfect sense when one steps back and views the author to reader value chain.  The innovations under negotiation in the Hachette/Amazon fracas have been long in coming and are changes the Big Five publishers should have gotten in front of and planned for years ago.

But rather than address the critical task of updating their business model, the Big Five have chosen instead to hunker down and defend the failing print-warehouse-distribute publishing paradigm. Time and resources that should have been spent developing the processes and tools needed to adapt to emerging technologies and provide for the long term viability of the major publishers were squandered defending business as usual.  In a recent NY Times piece, a publishing executive admits that the industry's leaders have no other strategy and are “all sort of looking around now, waiting for Moses.”  From a business perspective, this represents a stunning failure of imagination. 

Have no doubt; whether or not Hachette wins a battle in their current negotiations with Amazon, Amazon and the retailers going to win the war.  The publishing industry's apparent inability to re-imagine and remake their industry, to pivot, is making this outcome inevitable. As things stand, the publishing industry needs Amazon far more than Amazon needs the publishing industry.  The degree to which this is true is evident in that, while the remaining four of the Big Five privately voice support for Hatchette, that support does not extend to speaking out publicly on Hatchette's behalf, or reducing the volume of business they do through Amazon to show solidarity with Hatchette.  As the New York Times reported
It is in their interests for [Hatchette's] Mr. Pietsch to drive a hard bargain, and they are cheering him on, but silently. They have their own relationships with Amazon to protect, and they do not want anything they say to be construed as antagonistic....
Many readers have limited access to book stores, and for much of that audience Amazon is the book store. That readerships buys a lot of books from Amazon published by the Big Five.  Given the current business terrain, the demise of that outlet would be the worst possible outcome for any of the Big Five publishers. Ginning up mistrust of Amazon among authors and the literary elite, Hachette's current negotiating tactic, does nothing to change said terrain.

The place of traditional printing and shipping of print books will continue in the foreseeable future. However, it is going to be an increasingly smaller part of the production cycle. Publishers of the past have been able to leverage their control of print and ship to drive deals favorable to themselves with both authors and retailers.  Publishers of the future must confront the likelihood that they will lose that control and find ways to prosper without it.

If they are wise, the Big Five will develop experimental imprints dedicated to proof of concept work with POD and other emerging technologies of interest to the publishing industry.  Working with authors and retailers, such imprints would allow publishers to proactively determine how technical innovations like POD affect the industry and what business processes and contractual innovations are needed to balance the interests of authors, publishers, retailers and customers.  Experimental imprints would reduce the uncertainty associated with technological change, and allow industry participants to prepare for the future, rather than being ambushed by it.

Publishers of the future will take careful stock of their contributions to the author to reader value chain if the printing and distribution links in that chain are much reduced.  At present the major phases of the publishing process include acquisition, copy editing, graphic design, production, distribution and marketing.  It's possible the production and distribution phases could eventually be reduced to generation and dissemination of digital files to authorized retailers and the accumulation of print and sales activity from those retailers.  In that case the publishers must focus on their remaining links in the value chain, namely acquisition, copy editing, graphic design and marketing.

Publishers are quick to tout their competitive advantage in these areas, and they are highly valued by authors who've had the opportunity to work with a large publishing house.  The Big Five remain, for better or worse, generally accepted arbiters of quality with extensive pull in the retail markets.  With so many titles competing for Joe's beer money, a Big Five imprimatur will still continue to be seen as a means of separating the wheat from the chaff.  Those advantages will still remain with the large publishing houses if their role as printers and distributors is diminished. However, mainstream publishers will be well advised to maintain a laser-like focus on acquiring and retaining the best authors and superior execution of the pre and post production phases of the publishing process. Absent high barriers to new competition, established imprints will thrive only if they deliver on their reputation.

Just as some retailers like Amazon have begun competing in the publishing industry, the publishing industry might consider extending itself into retail order fulfillment; expanding rather than shrinking their role in the author to reader value chain.  Given the publishing industry's experience with managing print and logistic chains, opening up POD equipped fulfillment centers of their own and selling that service to Amazon's competitors would seem a reasonable strategy. This aligns with talk among mainstream publishers of establishing a marketplace to compete with Amazon, and in doing so publishers would avoid ceding an 'infinite inventory' advantage to Amazon by providing POD based fulfillment functionality to all retailers.

While the age-old passion for books and literature may act as a point of friction against market forces for a time, the book industry is a business.  The cold calculations of profit and loss will prevail.  New technologies will defeat old business models.  It's nothing personal.  It's just the future.  As any writer of the future worth his salt knows, hiding from the future or hoping it will go away are exceptionally bad ideas. Stories of those who have attempted it are legion, and rarely end well for the future-averse.

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