The Business Rusch: How E-Books Will Save Big Publishing
(Changing Times Continued)
Kristine Kathryn Rusch
In my very first post in this long series of linked topics, I advised anyone who cared about publishing to keep up with the day-to-day industry news. I wrote that blog post in my spare time over four days and I noted: “In four days, some parts of the [publishing] landscape changed—small parts, mind you, but they changed. That’s how quickly the sands are shifting.”
The sands continue to shift. Last week, I mentioned that expensive overhead is one of the problems Big Publishing has—and by Big Publishing , I mean established commercial publishers who run multimillion dollar (in many cases multibillion dollar) corporations. (Find that definition and more essential stuff in my second post). One aspect of that expensive overhead are the long-term rents they pay for their office buildings.
I posted that on the 2nd of November. On the 6th of November, The Wall Street Journal ran this article: “Big Book Publisher to Reduce Its Offices.” Random House Incorporated—which is a unit of Bertelsmann AG (remember, corporations inside of conglomerates)—announced that it plans to sublease more than a third of the office space that it holds in its headquarters building. (It has other buildings.)
According to the article, that’s nine of 24 floors or 250,000 of 645,000 square feet. Random House hopes to get $55 per square foot for its sublease.
There are many other nuggets in this short article. First, a passing mention of a fact: Random House used to own the building. The company bought the building in 2003 and then sold the building in 2007. As part of the sale, or just afterwards, Random House agreed to a long-term lease for its office space inside the building.
Random House is doing exactly what I said Big Publishers need to do to stay competitive—hell, to stay alive—in the modern market. They’re trimming overhead. Because of layoffs (remember, cutting staff to the bone was a way of keeping book costs down), Random House now has a 30% vacancy rate on its floors.
So let’s figure this out, using the numbers the article provided us. At the moment, Random House, trapped in a long-term lease (ten, twenty, or thirty years), is not using 30% of its office space. That’s 193,500 square feet vacant, which is costing Random House at least $55 per square foot or $10,642,500. That’s per month. That’s almost 128 million dollars per year wasted on empty office space.
Random House doesn’t have a lot of maneuverability here. It signed a long-term lease after the sale of its building (probably reducing its overhead at that point). It laid off a lot of employees, as many as it could and still keep its company viable. It cut back on the number of books produced per month. And now, it’s trying to reduce overhead again.
If Random House manages to rent that 250,000 square feet of office space, it will have to cram down its own office space even farther. Right now, it’s occupying the additional 56,500 square feet of office space. Editors and assistants, the art department and sales force, will have to move into closer quarters.
But if they do, and if Random House gets its $55 per square foot asking price, Random will take in $13,750,000 in rent per month. Random House will go from losing $10,642,500 per month to making $3,107,500 every month. (Of course, Random House will still pay the rent on that 56,500 square feet of office space, but it’s paying that now—and using the space, which makes it a legitimate expense, instead of a continual useless loss on the balance sheet.) If Random House’s advisors, lawyers and accountants are smart, the company will make a small profit per square foot on the sublease. But Random House could simply be breaking even or taking a small loss. Even a small loss is a win after that ten-million-dollar-plus monthly loss.
Random House’s announcement this week gave the readers of this blog a gift. The announcement makes my point so much better than my vague pronouncements do. As I’ve said before, publishing is a multibillion dollar industry. One that allows a single corporation to swallow 128 million dollars in loss for the past few years. Of course that has an impact on the corporation’s profitability. But these changes that Random House is making—within the limited options it has—improves profitability.
It also gives Random House some breathing room. And that’s what Big Publishing needs right now. Breathing room. Because something everyone has feared has finally come to pass: the business model for commercial publishing is changing and companies need to change with it, or they’ll die.
Last week, I ended my blog with this controversial statement: Electronic publishing won’t cause the demise of Big Publishing. Electronic publishing will save it.
Here’s why. As I tried to show last week and as the Random House example above aptly illustrates, Big Publishing has a huge overhead that it can’t easily get rid of. Smart people, people with clout, people with more business sense in their thumbs than I could ever hope to have, have seen this problem coming and have tried to change it for decades. The reason you often hear about the collapse of publishing from people in the know (not the death of publishing as the bloggers claim) is because of this horribly unwieldy, costly, and somewhat stupid business model. It’s not that Big Publishing is filled with stupid people who can’t see where this will lead. It’s that the system is set up to combat change.
Booksellers will fight the loss of the returns system by refusing to order books that can’t be returned. Long-term contracts—like that lease above—make it impossible to move a large corporation to cheaper production models and to cheaper office space. Big Publishing has responded to all of these challenges (and others too numerous to mention) by making incremental changes. The incremental changes have kept Big Publishing going (as has the increased literacy among a growing population, mentioned in part two), but the incremental changes haven’t solved the fundamental problems.
Now remember, we’re talking about Big Publishing here. Existing commercial publishers. Smaller publishers can come into the business with a different model and survive—there’s a lot of money to be made in this industry, particularly with a well-managed modern company—but that’s not our focus today.
Today our focus is on the existing businesses, the ones that need to develop a brand-new business model to survive.
Let me give you a short and very general overview of what happens in a corporation that’s a “unit” of a conglomerate when radical change gets proposed. (Those of you who work in these kinds of corporations in other industries already know what I’m talking about.)
First, a series of analysts find the problems. The analysts (either in-house or brought in special) will suggest radical change. The radical change will have three costs: one in actual dollars, one in time, and one in disruption. Other parts of the conglomerate will have to fund those costs while the corporation goes through the change. I can guarantee that it is less expensive, less disruptive, and in the short term, better for the conglomerate, to live with the problems, serious as they are, than it is to go through the upheaval and expense caused by radical change.
So the conglomerate, the corporation, and the really smart people within will find some kind of compromise, pushing the problems off until such time when they can’t be pushed off any longer. These delaying tactics are built on hope: hope that the market will change in favor of the corporation, hope that the problems won’t become serious enough to have a major effect on the corporation’s bottom line, and hope that the problems won’t have to be dealt with until someone else is in charge of the corporation.
That, in a nutshell, is what Big Publishing has been doing for the past twenty or more years. Big Publishing has been doing what it can to survive until something makes radical change inevitable.
Enter electronic publishing.
Big Publishing has known that electronic publishing was on the horizon for those same twenty years or so, but has chosen to ignore it. Why? Because until the introduction of the Kindle, e-reading devices haven’t caught on with the average reader. Electronic publishing was seen as a small arm of publishing, something that could be added to the repertoire like audio books have been, something that doesn’t get in the way of books, but enhances them.
Had Big Publishing remained in control of the electronic publishing marketplace, electronic publishing would not have become such a big deal. Big Publishing did make nods toward electronic publishing as far back as the mid-1990s, by attempting to change writers’ contracts and trying to grab rights.
But the rights grabs and the contract changes meant very little when placed inside Big Publishing’s business model. (Please note that other publishers, like textbook publishers, have a different business model.)
Big Publishing—big commercial publishing—has a “produce” business model. Because books occupy shelf space and shelf space is limited, bookstores need to “turn” (change) their inventory on a weekly or monthly basis to attract customers. Big Publishing responded by developing a way of publishing books that works like this:
Each book must make back its costs and preferably earn a profit within the first few months of its initial publication. Because after that, there’s no guarantee that the book will remain on the shelf. And remember, each book must carry the weight of a second book with it because of the returns system. So each book must earn back double its actual cost within the first few months of its initial publication.
Not all books earn that well, of course. But some books continue to earn for years, making up for the losses of the other books.
But the point here is that each commercial publishing house’s accounting system is based on this “produce” model. Books are purchased with an eye to a quick return. Longevity is a bonus.
Even the bestseller lists are designed to reflect this. A book that has 100,000 sales over the course of a year might not make a bestseller list. But a book that has 25,000 sales in less than a week might. Even if the second book never sells more than the 25,000 copies, publishing houses reward those books (and their writers) much better than they do the books (and their writers) whose 100,000 copy sales build after a slow start. In fact, sometimes those writers will see subsequent books go out of print because the first few months of the book’s sales are “disappointing.” The slow build of the previous book will not happen because the existing business model won’t allow it.
The “produce” model came into being as a response to the needs of publishers and booksellers. As John Updike wrote in 2008 (before the e-book revolution began), “Although books circulate ever more swiftly through the bookstores and back to the publisher again, the rhythms of readers are leisurely. They spread recommendations by word of mouth and ‘get around’ to titles and authors years after making a mental note of them.”
Electronic books, with their virtual bookstores and unlimited “shelf” space, reflect the rhythms of readers. Electronic books don’t have to go out of print, so a reader can find a book years after publication. It’s ideal from the point of view of writers and readers. From the point of view of Big Publishing, it’s a whole new way of thinking.
You’d think Big Publishers would adopt this way of thinking immediately. But it doesn’t work that way. The books still have to make the bulk of their profits in the first few months of publication. At the moment, a slow build can’t factor into a publisher’s profit-and-loss statement because no one knows how this will all play out.
Yet, I stated firmly that I believe electronic books will save Big Publishing. It has less to do with costs or the longevity of book titles than it does with corporate politics. Let me explain.
J.A. Konrath and other bloggers state that the costs of publishing an electronic book are “significantly” less than the costs of publishing a regular book. And if publishing didn’t have insane publishing practices, that would be true.
However, here’s the reality of how books get published in commercial publishing. The book’s fixed costs are its advance, its cover, its interior production, and its slice of the overhead. Those costs will remain the same, even in electronic books. Right now, Big Publishers send electronic files to printers and binders or they send the electronic files to e-book venues.
Big Publishers do save money on the costs of printing, binding, and shipping the e-books. E-books don’t have returns, so that double expenditure on printing, binding, and shipping doesn’t happen.
But…right now, e-publishing is new and the formats haven’t shaken out yet. Kindle’s format requirements are different from PubIts, which are different from iBooks. I’m sure you get the picture. To negotiate all the different formats, Big Publishing needs actual people to do the work. Labor costs are the highest costs in any business. And the hours someone spends on a book to format its e-file will then go into the cost of the book, negating some of the savings from the printing, binding, and shipping.
In other words, it’s not as cheap as the bloggers think for a Big Publisher to put out an e-book. (This labor issue, by the way, is why some of the early books from Big Publishers had formatting problems. Big Publishers saw e-books as a tiny, insignificant part of the business and tried to use the same electronic file that they sent to a physical printer for their e-books. It took some time to figure out that this was unwieldy at best, disastrous at worst.)
Economically, the savings are minimal and Big Publishing’s “produce”-based accounting systems aren’t going to change any time soon. (There are reasons for this beyond accounting; we’ll discuss those in the writer sections of this prolonged examination of publishing.) That’s really not a major concern; “produce” systems exist inside other entertainment venues as well. For example, the major television networks still roll out their fall premiere week and advertise it in a “produce” fashion, even though almost every television show ever aired is available on DVD or as a streaming download. People like new and exciting, just as they like catching up on old favorites.
The way that electronic publishing will save Big Publishing has little to do with “produce” or savings on rents or shelf space or the returns system.
It has to do with the crisis mentality.
Right now, Big Publishing recognizes that electronic publishing will fundamentally change the business model. Everything is moving quickly. Last year, e-book sales were less than 2% of total book sales. As of last week, they were 9%.
Let’s put this a different way: In 2010, consumers will buy close to one-billion dollars in e-books. Some experts believe that by 2015—five short years from now—e-book sales will total three billion dollars. That’s “billion.” With a “b.”
That’s a lot of money. The kind of money that makes conglomerates sit up and take notice. The kind of money that stockholders pay attention to.
So, when a CEO of a corporation inside the conglomerate tells the conglomerate that the corporation needs to make drastic changes to its business model or face extinction, the conglomerate listens. Finally. The crisis that the smart people inside Big Publishing have been waiting for has arrived.
Nimble corporations will make internal changes to the business model. Finally, they can take the risks they’ve been wanting to take for more than a generation, and they’ll have the backing of everyone in doing so.
You can see bits and pieces of those changes already. Random House is a prime example—not just in their cost-cutting measures, but in their fights over e-rights.
What this means for Big Publishing, really, is a way to finally get out from under the returns system, which has threatened to strangle the business. It’s a way to lower prices and to expand product lines. Harlequin is already doing so with its Carina Press, a model of experimentation.
Carina Press is online only. It buys the books for no money up front, just a share of the profits. The books are edited by freelance editors, produced by freelance designers, and then published on Carina Press’s website at a very low price point. If a book takes off and goes past a certain e-book sales point (which is known only inside the company), then that book will get a print edition. [Correction: Angela James of Carina responded below and explained how the system works for in print books. Check the comments here.)
This branch of Harlequin has minimal overhead: no advances, freelance fees only, and almost none of Carina’s staff works inside Harlequin’s Toronto offices. (Again, a correction: I’m wrong about the almost none. [That's what I get for not following up on info I got six months ago.] Please see Angela’s post below.) It’s a bold experiment. Harlequin, unlike its New York competitors, has been known for bold experimentation, being one of the few publishers to work on the subscription model into the late 20th century. (For the longest time, the category romances were published without allowing returns, which was why major bookstores didn’t carry them.)
Carina Press is just one example. There will be others.
For the first time in years, I’m hearing a lot of positive buzz about publishing from within publishing itself. Everyone knows change is coming, and a lot of people understand that the change (while disruptive) will ultimately be for the good.
The changes won’t happen all at once. They can’t, because as I’ve said a bunch of times, Big Publishing is not a monolith. Every corporation will handle these changes differently. The experimentation inside each publishing house will differ according to that house’s needs.
But the powers that be—the conglomerates and stockholders, the people who have their fingers in a bunch of pies (not just publishing)—finally understand the need for change. And the change will happen swiftly. The change will happen because otherwise, the publishing branch of a conglomeration will die.
Some publishing houses will die. Corporations whose names we recognize will cease to exist. They won’t be nimble enough to make the necessary changes—or despite the air of crisis, they won’t get permission to make the sweeping reforms. Other publishing houses will move through this change with apparent ease. As Steve Mohan mentioned in last week’s comments, some really savvy person in some major publishing house will come up with a publishing scheme that will change the business model forever. That house will back said savvy person, and the changed business model will create dominance and increased profits for that publishing house. Other publishing houses will notice, and do their best to adopt the new model.
What, exactly, will the new model be? I doubt it’ll be Carina, although it might have aspects of Carina. I’m sure that new model hasn’t found its way into the public yet (although it might be being discussed in some boardroom as I type this).
Why should we care if Big Publishing survives? There are two short answers, really. The first is that despite what the blogosphere tells you, Big Publishers are very, very good at promoting books and writers and reading. I’ll deal with this aspect of publishing in-depth in the writer sections of this long series of essays.
The second reason is even more obvious. If a place like Random House can spend $35,475,000 per month on rent for its New York offices alone, if you figure that 9% of the book market will bring in one billion dollars in sales in 2010, then we’re talking about an industry with a phenomenal impact on the economy of the United States. If that industry disappeared in 2012 like some of this silly bloggers predict, the economic impact of that loss would be staggering—not in book sales, but in lost wages, lost rent, lost utilities, and so on.
As I mentioned, a lot of people much smarter than I am know all of this and are working their tails off to make sure Big Publishing survives into the 22nd century. Judging by the mood of the industry, a lot of those smart people see a brilliant light at the end of the tunnel for the first time in decades.
That’s good news for all of us.
I’m out of room again. This topic is vast, and I’m going to try to cover all aspects of it in the blog. In a general way, of course, because it’s impossible to be specific about something this big. I appreciate all the support I’ve gotten so far on my decision to tackle this topic. Please feel free to forward information about this post to other lists, or friends. I make only one request: Ask them to read the previous posts so that this one is in context.
“The Business Rusch: How E-Books Will Save Big Publishing” copyright 2010 by Kristine Kathryn Rusch.