The Business Rusch: Understanding Publishing (Changing Times Part 2)

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The Business Rusch: Understanding Publishing

(Changing Times Continued)

Kristine Kathryn Rusch

As I mentioned last week, I’m going to finally examine the elephant in the room—the changes in my industry, publishing.  I realize that many of you reading this blog aren’t in publishing, but you do run businesses.  I hope that the blogs I write in the next few weeks will remain relevant to you.  I also hope you will indulge me, even if you don’t find any information that you can use in your own business.  After all, you’re readers, and this change will have an impact on how you receive (and consume) your reading material.

Last week’s column was an overview.  Please read it before you read this one.

This week’s post will also be something of an overview, because the more I read the blogosphere on electronic publishing, the more I realize that most people writing about it have no idea how Big Publishing really works or what it does.  Big Publishing, remember, is the term I will be using for established publishers who run multimillion dollar (in many cases multibillion dollar) corporations.

Last week, I mentioned that the previous big technological revolution in publishing came with the invention of the printing press.  Honestly, if you look at the history of the England and the United States, you realize just important this revolution was.  Books no longer became the province of the rich or of churches.  No longer did information have to be laboriously copied by hand.  (Of course, the art of the illustrated manuscript got mostly lost after the invention of the printing press, but that’s another story.)

Information spread—not just in the form of books, but in the form of pamphlets, broadsheets, announcements, newspapers—you name it.  New art forms developed, like satirical/political cartoons, which weren’t just a single panel in a newspaper, but were printed in broadsheet form and distributed to those who couldn’t read.  (Okay, I’m letting my historical geekiness show. Rather than get totally derailed, I’ll quit now and maybe examine this in some other post.)

Initially books were sold through the mail by subscription.  Bookstores became important as well, but they only existed in large cities.  People could walk inside and handle the book they wanted to buy.  Libraries also got their start around this point.  Those of you who live in New England still have library buildings that proudly proclaim they are the “free” library of such-and-so town, because, for a while, libraries (like everything else) were only available to subscribers.

For a very long time—into the 20^th century, in fact—people wanted to keep books and information away from the masses.  Books should only go to those who can afford it.  This was one of the ideas behind “high” literature and “low” literature (or in modern terms “literature” and “genre fiction”).  When it became impossible to keep books away from the masses by price and subscription alone, snobbery developed.  Hardcovers became the literature of the elite and broadsheets, pulp magazines, paperbacks (over time) belonged to the unwashed.  Mass readership was a threat—not just to elite attitudes, but to political power bases as well.  (Okay, I promise.  I’ll quit soon.  But I can’t help myself: this is where my geeky love interests collide: books, politics, history…)

Anyway…books became widely available.  Let’s fast-forward to the end of World War II in the United States when the GI Bill enabled poor veterans to go to college, teaching them a love of reading, which they then passed on to their children, who have passed it to their children, who have passed it—well you get the idea.  This happened throughout Europe as well, as education became open to all aspects of society, not just the ones who could afford it.

What this meant for the book industry is pretty simple: the market grew and grew and grew.  Growth slowed in the 1980s, but it slowed to an average of 4% per year which is, by most business standards, a huge growth margin.  (Most businesses either have a gigantic margin 20% or a slim one, less than 1%.  Many businesses are happy if they do the same amount of sales from one year to the next.  Those with the large margin usually flame out and disappear after a decade or so.  Those with the slim margin generally stay in business the longest.  For a long-term industry standard to remain at 4% is unusual to say the least.)

The strangest part of the publishing industry—at least to me—is that its spokespeople are gloom-and-doom types.  The industry is “in a crisis” if it only has a 3% growth or if the growth isn’t as high as expected.

I do think some of this comes from all those years when literacy rates increased dramatically, leading to increased book-buying.  Such increases were unsustainable as the gigantic baby boom worked its way through the population.

If you study the history of the publishing industry from 1950 forward, what you’ll find is a history of expansion (even after the famous distribution collapse of the late 1950s—or at least, famous within the publishing industry).  For two decades, I have said that the days of the Great American Novel are over—not because we no longer have writers capable of writing it, but because there is so much product American readers do not read the same books any longer.

Well known writer, editor, and publishing industry watcher, Michael Korda states the same concept in a different manner.  In his book, Making The List: A Cultural History of the American Bestseller 1900-1999, Korda writes,

“…a bookstore is likely to carry thousands of titles, only a small percentage of which will have been bestsellers.  Indeed my first reaction on entering a bookstore is to stand there awed by the sheer diversity of human taste and interest; there is always a part of me wondering, ‘Who on earth would buy that, and why?’”

Note that Korda wrote these words ten years ago, before the changes that are hitting the industry now.  (In fact, his entire introduction which gives a history of the bestseller list—and of reading in the 20^th century—is worth the price of the book.)  Now there are even more books, available through even more outlets, books that appeal to niche readers as well as books that appeal to “everyone.”

Of course, not all bestsellers appeal to everyone, but that’s another essay for another day.

What all of this means has nothing to do with the bestseller list or taste or quality or restricting information. What it means is that readership has grown, and continues to grow, which fuels the industry.  What most people—in and out of the industry—forget is how few readers it takes to make a book profitable, so long as the upfront costs of that book are minimal.

If a writer makes a $5000 advance, the publisher will spend roughly $75,000 to publish and distribute that book (including the advance).  That book needs to sell 7,500 copies at $10 to recoup that advance.  With discounting, the publisher will probably charge $11, and break even.  At 10,000 copies, the publisher will make a profit.

Ten thousand copies of a single book in the space of a few months—because publishing operates (like most business that supply product) on a turn—the product turns over within a given amount of time.  Ten thousand copies scattered across the United States, which has millions of readers.  Let me repeat that: Millions of readers.

The October 15, 2010 Entertainment Weekly has this mind-boggling statistic: Nora Roberts sells 27 books per minute.  That’s more than 14 million books per year, not counting the people who bought her books the year before or the people who will buy her books next year.  Nor does it count the books by other authors that those readers will buy over the course of that year.  (If you don’t like Nora Roberts or think she’s a special case, let me give you another statistics from that same issue: Stephenie Meyer sold 1.3 million copies of Breaking Dawn during the book’s first 24 hours of availability.)

So when I tell you that sales of 10,000 is small in modern publishing, believe me.  It is.  And that’s why you can have books like Michael Korda’s Making the List, which will only appeal to a niche group of readers, in the very same bookstore as an entire shelf of brand new Nora Roberts books.  Because—guess what, folks?—I’m the niche reader who bought the Korda and the reader with mass market tastes who bought more than one book by Nora last year. (Eight, I think, at last count.  Although it might have been ten.)

A hundred years ago,  a niche book like Korda’s would not have sold into the publishing industry any more than the ten or so new Nora Roberts titles would have sold into the industry. There simply weren’t enough readers to sustain that kind of volume.  And now there are.

Why is this important? Because the growth in literacy and the growth in reading for pleasure are the parts of the change that no one—and I mean no one—is talking about as this revolution happens.  And without that, this change in publishing would simply not occur.

In order to understand the rest of the changes, you need to understand the business model behind the entire industry—a business model that has existed for literally hundreds of years.

Writers provide content (product) to Publishers.

Publishers distribute that content to Readers.

That’s it.  For more than a hundred years, publishers distributed that content directly to readers through subscriptions.  That model was the main publishing model until the early 20^th century, although some publishers still use it.  (Harlequin’s main source of distribution until the late 1970s was via subscription—directly to the readers—because bookstores wouldn’t stock their books.)

Gradually the model changed to this:

Writers provide content (product) to Publishers.

Publishers distribute that content to Bookstores.

Bookstores distribute that content to Readers.

By the late 20^th century, there was one more hand in the pie:

Writers provide content (product) to Publishers.

Publishers distribute that content to Distributors.

Distributors distribute books to Bookstores.

Bookstores distribute that content to Readers.

Readers buy the writer’s product (which for simplicity’s sake, we’ll call a book, even though this model includes newspapers, magazines, articles, short stories—anything written).  Everyone in that distribution pipeline takes a percentage of the earnings—from the bookstore to the distributor to the publisher to the writer.

Right now, the writer does not pay the bookstore separately from the publisher.  The writer pays the publisher from the book’s earnings, after the other ends of the pipeline have taken their cut.  Note that I say the writer pays the publisher—because it all begins with the writer and with the book.

How does the writer pay the publisher? Via a contract, in which the writer gives up a percentage of the book’s earnings so that the publisher prints, binds, and distributes that book.  Why would writers do that? Because it was always hard to get books to readers.  Most writers wanted to write, not set up a book distribution network or a subscription service.  It was the rare writer, like Benjamin Franklin, who owned his own printing press and distributed his own work.  Franklin published the work of many other authors and distributed that work throughout the Colonies (before they became the United States).  He’s just one example.

Currently, writers pay Big Publishers about 90% of a book’s earnings to distribute that book nationwide.  The writers keep about 10%. They usually get that 10% up front before the work is completed. That’s a sweet deal.  How many other industries pay providers up front to produce?  Usually providers swallow that start-up cost as part of their business model.

There are a lot of sweet deals in the publishing industry. They don’t just benefit writers. The largest beneficiary of the sweet deal is the bookstore which is allowed to return its entire inventory for full credit if the inventory doesn’t sell.  (Those of you in other industries—like the grocery industry—imagine how that one detail would change your bottom line.)

These sweet deals came about over time and via convention.  And it’s always hard to change a sweet deal once it’s in place.  So sweet deals have made the industry more and more costly.  The growth of readership has enabled the industry to maintain these sweet deals for a long time, but that’s changing—which we will get to in a future columns.

The technological change in the publishing industry that we’re going through right now enables writers to cut out the publisher entirely.

The model of the change looks like this:

Writers provide content (product) to Bookstores.

Bookstores distribute that content to Readers.

The definition of Bookstores is also changing.  A Bookstore is not just a storefront, but it is also a virtual storefront with unlimited shelf space.

The other side of the technological change that so many in the blogosphere also ignore is this: In addition to publishing a book electronically without going through a publisher, a writer can also publish a book in paper form without going through a publisher.  Writers could always do that, but then the book could not get into the distribution channels.  Real bookstores, like Barnes & Noble, or the Little Bookshop On The Corner, would not take “self-published” books without a lot of effort on the part of the writer.

Now, thanks to places like CreateSpace and Lightning Source, real bookstores can—and do—take self-published books, with almost no effort on the part of the writer. The writer simply has to click a box on a form (and pay a few dollars).  That’s it.

Electronic books—and paper books—can come from the writer.  The writer spends 30% of his earnings instead of 90% to get his books to readers.  Talk about a sweet deal.

But, as I mentioned last week, there are problems with this, problems I will deal with then I deal with the writer side of the equation.

Writers may still want Big Publishing to print, bind, and distribute the book for them.  Writers will have a variety of reasons (good and bad) for doing so, all of which I’ll examine in the next few weeks.

A friend of mine, a longtime professional writer, who has delved into this brave new world of publishing asks, “How long will it take before writers start to question whether or not Big Publishing is worth 90%?”

Writers are starting to question that.

The more important question for the industry, however, is this:  When is Big Publishing going to realize that its services are no longer worth 90%?  Will it cut its take of the pie? And if it does, what other changes will that entail?

What I want  you to notice from this entire post are two things:

1.  Writers provide the content. Writers are in charge.  Without writers, there is no publishing industry—and there never will be.

2. Publishers came into being because writers needed distribution for their product, and didn’t want to do the long hard work of actually publishing and distributing that book to a nationwide audience. Writers were willing to pay the publisher to do this.  In fact, for a very, very long time a big publisher was the only way writers could reach readers in any meaningful way.

These two facts will not change.  Writers will provide content and publishers will provide a particular kind of distribution.  What’s really being discussed—behind the scenes, in boardrooms, and in hushed tones among people who understand business—isn’t whether publishers will go away.  It’s: What form will publishers take in the future? And built into that question is this one: How much money will Big Publishing lose as these changes occur?

Because the business model is changing—not the writer to reader part of the model. That will always remain the same. Writers need readers who will pay for content.  But the distribution part of the model.  That change is occurring because of a huge (expected) change in technology.

Remember the television business model from last week.  The Big Three Networks did not go away, but they lost revenue and audience.  Big Publishing will lose revenue and audience during this change.  How much depends on how quickly Big Publishing can adapt to the new publishing environment.  But know this: Big Publishing will adapt.

We’ll dive into Big Publishing next week, although I’m sure we won’t finish it.  There’s too much to cover.  Before I leave you, however, I’ll give you my favorite new statistic from this week:

In Barnes & Noble’s press conference for the new color Nook, this fact came up in the question and answer session:

Barnes & Noble has found that e-books and paper books don’t compete.  Nook buyers have increased their physical book purchases by 21%.

That’s right.  An actual statistic that shows the anecdotal evidence is correct.  E-book buyers buy more books—in both electronic and paper form—than they did before they bought e-readers.

And that’s good news.

I’m very excited about these changes in publishing. I’m a very different writer from the one who started blogging about business 18 months ago.  With my blog, I’m going directly to my readers for my income. No publisher, no distributor. So I do rely on you to pay me for the content of this blog.  I also rely on you to spread the word about the business blog. Thanks!

“The Business Rusch: Understanding Publishing” copyright 2010 by Kristine Kathryn Rusch.