The Business Rusch: Rapid Change (Changing Times Part Twelve)

The Business Rusch: Rapid Change

(Changing Times Part Twelve)

Kristine Kathryn Rusch

Back when I wrote my first post on the changing times in publishing in October, I said that changes were happening so quickly that I knew some of what I wrote at the beginning of the series might not be relevant at the end of it.  While the events that have happened in the last two weeks haven’t changed my opinion on the benefits and pitfalls of the new world we’re moving into, it does seem like we’re moving even faster than I expected.

I planned to write more about midlist writers this week, but these changes are too important to ignore.  I’ll get back to our regularly scheduled midlist discussion next Thursday.

In case you were actually enjoying your holiday instead of watching business trends, let me tell you what happened over the normally quiet holiday break.  (Besides half of you getting stuck in airports.)

First, the sale of e-readers was higher than anyone expected. We expected e-reader sales to soar, but we didn’t expect them to explode.  And what’s more, no one (including me) made the connection between the sale of e-readers and the increased e-book sales volume on Christmas weekend.

Yes, we all expected the new e-reader purchasers to order books. We didn’t expect these folks to crash the Barnes & Noble website twice that I know of, maybe even more often.  Borders website, which doesn’t have the volume of B&N, also crashed over the holiday weekend. Even Amazon.com, which did plan better for the volume than the others did, ran so slow over the holiday weekend that people had to wait more than 30 seconds for the site to load.  (I know, I know.  We complain about the strangest things these days.)

I knew that the increased sales of e-readers would have an impact on my e-book sales.  I did not expect those sales to rise as dramatically as they did.  The volume of sales in that last week of December for both me and my husband, Dean Wesley Smith, was nearly triple the volume we had in the first 24 days of the month.  And neither of us, much as our fans love us (and we appreciate our fans), are the writers that everyone thinks of to buy first with their new e-readers.  I’d love to know what the sales volume was for Steig Larssen or for Nora Roberts.

I do know that the CEO of Thomas Nelson books, Michael Hyatt, tweeted on this on Monday: “Our ebook sales for Christmas week were up 323% over last year–more than I anticipated.” [link]

Man, if you compare to last Christmas week, our sales (mine & Dean) were up more than 200%.  But just comparing to earlier in the month is startling and more accurate, considering the amount of product we have up.  Amazon.com announced last week  that the Kindle is now its biggest selling product ever, outselling Harry Potter and the Deathly Hallows.  Considering that Amazon does not release sales figures, we can only guess at the exact number, but what it does mean is this: Millions of Kindles sold in 2010, most of them in the last month of the year.

Those Kindles need to be filled with ebooks. Expect ebook sales to grow even more dramatically in 2011.

Combine this news with the downbeat news of the season coming out of Borders Books.  On Friday (yes, New Year’s Eve) The Wall Street Journal reported that Borders has delayed its year-end payments for inventory.  What that means, in layman’s terms, is that Borders has decided to stop paying its bills—for books.  Which means that publishers will stop sending new books to Borders until those bills are paid.

This is a death spiral.  If you have a retail business, you need new product.  Previously, this news only got reported in trade industry journals (starting with Publishers Lunch on December 30).  But the fact that these news migrated to The Wall Street Journal for all the world means trouble for Borders.  As I searched for the link today, I note that WSJ has followed up with another article this week—one that mentions that Borders’ stock price has reached an all-time low of 86 cents.

The news got worse on Sunday as AOL Daily Finance reporter Sarah Weinman reported that a Borders bankruptcy seems likely in 2011.  The problem with the impending loss of Borders is this: If it does go down, 10% of the trade book business will vanish overnight.

I can’t find the link that I read over the weekend, which translates this 10% into dollars.  I do recall that Borders owed publishers something like 450 million dollars, but that figure is not exact.

Big Publishing can swallow its (large) share of those numbers if Borders goes into a liquidation form of bankruptcy (as opposed to reorganization).  It  will hurt, but it will be possible. (See how big Big Publishers actually are from my earlier posts.)

But the mid-level publishers and small publishers don’t have the ability to swallow a sudden significant loss like that, unless the company has other revenue sources besides the trade book area (like, say, a textbook publishing arm). (See how mid-level and small publishers handle their income in my earlier posts)

What Borders needs is a sugar daddy, someone to come in and pay its back debt. But with Borders stock price so low that it might be delisted from the New York Stock Exchange, that sugar daddy either has to really, really believe in Borders or really, really, like books or really, really need a fast place to dump a lot of cash (and take a loss [yes, investors sometimes do that on purpose]).

Will all that happen?  I don’t know.

But what everything that happened over the normally quiet holiday week means for the publishing industry is this:

The shakeup in Big Publishing in the next six months could be profound.  Big Publishing, as I wrote in my previous posts, can’t move quickly.  They’re trying.  There are signs everywhere that Big Publishing realized the importance of ebooks in the last few months of 2009 and the beginning of 2010.

(Don’t believe me? Look at book covers.  They now have the kind of graphics that look good in hardcover and in the postage-stamp size needed for an ebook.  Books take two years to produce; the cover part of the process begins about a year before the book is published. This change in covers started appearing with the Fall lists in 2010.)

But just because Big Publishing finally understands the importance of ebooks doesn’t mean they’ll be able to move all of the inventory rapidly into the ebook format.  Nor does it mean that they can adjust their profit-and-loss statements to cover the changes in revenue.  Big Publishing thought it had three to four years to make this shift.  With the (potential) loss of Borders, it might have to do so in six months.

Why is the (potential) loss of Borders so important?  Everyone knew the company was in serious trouble and would probably go out of business sometime in 2011 or 2012.  Some bloggers (bless them) even predicted that the other big chains would go down because of ebook sales.  That’s not going to happen as I’ve stated in previous posts in this series.

Borders’ troubles come from mismanagement, not from ebooks.  If you want to see an excellent history of how Borders got into this mess, check out agent Joshua Bilmes’s blog on this very topic.  Borders is a study in how not to run a business—particularly a large business—which is another reason that the sugar daddy scenario is increasingly unlikely.

So if everyone knew about Borders, why the surprise in the press?  It has to do with the rapid change of Borders’ options, not to mention the highly stupid announcement that Borders has stopped paying its accounts.  If you want to murder your retail business, this is the way to do it.

Something will happen with Borders in the next few weeks. If Borders really and truly disappears off the bookseller’s map, then publishing will have to swallow a huge financial loss that no one was planning for yet.

Think about it: Publishing works on a 4% margin. The loss of 10% of the trade book revenue will destroy that profit margin in 2011, unless changes get made quickly.  Changes are tough in an industry that has already cut personnel to the bone and has years-long contracts with suppliers, as well as years-long (in some cases, decades-long) leases for their buildings.  The book lists are already cut back as far as they can go because of the recession.

With the (potential) loss of Borders, Big Publishing finds itself in an interesting place: Consumers want to buy its product, but the outlets for that product are either disappearing (Borders/independents) or growing so fast that the product doesn’t yet exist (ebooks).

I just exchanged e-mail with one of my publishers, asking when one of my 2010 novels would get its electronic edition.  I got an apology back, along with a vague answer, saying they’re trying to put their entire 2009/2010/2011 inventory into ebooks in the next six months.  The publisher thinks that’s the fastest they can do this, and it doesn’t take into consideration older titles.

Expect a mad scramble in 2011—both to save (or salvage) Borders and to move all of the back inventory into ebooks.

As I said above, the news isn’t all bad.  Barnes & Noble’s Nook sales, particularly with the color Nook, and the ebook arm (as inept as its interface is at the moment) has provided much needed revenue for the corporation.  The loss of Borders will, in places that had both chains, increase B&N’s business dramatically.  (Unfortunately for those of us in the sticks, the loss of Borders could mean we lose easy access to a nearby new bookstore.  The loss of our Borders (an hour away) means that if we want only new books, we’ll have to drive two hours to get to the nearest B&N.)

Independents will step up. Already, our local independent is increasing its stock of new books in anticipation of the loss of Borders.  Remember, 91% of all readers still prefer paper books.  (Of course, heaven knows what that actual statistic will be after this holiday flood of new ebook readers. Even if it rises faster than expected, I don’t imagine ebook readers will hit more than 20% in the next six months.  That would mean that 80% of all readers still want paper.)

Independents are feeling the pinch of ebooks and trying to find a way to sell them.  But some independents are growing, and I suspect, once the independents figure out how to deal with e-books, they’ll change their business accordingly.

Small and midlevel publishers are the ones who could be hurt the most dramatically by the changes of the past two weeks.  What will happen to those publishers will vary from publisher to publisher, and will be based on two very large factors:  First, the publisher’s exposure to Borders, and second, how much of that publisher’s inventory is already in electronic format.

Let’s take the exposure to Borders first.  What I mean by that is this: How much of that publisher’s accounts receivable are tied up in Borders?  Is the percentage small (less than 1%)  or large (over 10%)?  Does that publisher have other means of making money?  Some textbook publishers, for example, have ventured into trade publishing.  Textbooks get published through an entirely different system, and make money in a different way than trade books.  So the textbook arm could provide a cushion.

But if that publisher is solely a trade publisher, then it needs to reduce its exposure to Borders.  That was tough in 2010 because the chain bookstores were often the only game in town and in some towns, as I mentioned, Borders was the only chain.  So the publisher had to go to Borders if they wanted large distribution of a title.

The problem here is pretty simple:  if Borders goes into bankruptcy, creditors will line up according to liability and type of debt. Inventory debt (publishers in this case) is unsecured.  Unsecured debt is paid last, along with other unsecured debts. That’s how bankruptcy courts generally work.  (Yes, I’m simplifying.  I’m not going to explain the different kinds of bankruptcy or the role of judges and others in the proceedings.)

Borders has already ordered its franchise stores to stop processing returns.  Meaning that Borders is trying to hold onto the inventory it has so that there will be something in the store when a customer arrives.  That also means that the publisher will lose that book and Borders will owe the publisher money.  If the publisher were able to get its product back, that would lower the publisher’s exposure. But Borders itself is preventing that at the moment.  Once Borders goes into bankruptcy, the unsold inventory will not be returned, but will be part of the bankruptcy proceeding as an asset of the company (something that can be sold to pay back debts).  Complicated, I know.  And the worst impact will be on smaller companies.

If those companies have already moved to the electronic frontier, however, the gains they make in e-book profits might offset the severe losses from Borders. Again, it depends entirely upon how these smaller publishers are managed internally.

Writers won’t know that how a small publisher is doing until (unless) payments from that publisher slow considerably. (This is a slowdown from the norm.  If the publisher is normally a slow payer, then they have to become a very very slow payer for this to apply.  If they pay quickly and suddenly stop making payments for a quarter, that’s a slowdown.)  Once a small publisher slows payments to its writers, then it’s pretty clear that the publisher is having financial trouble.  If you writers find yourself in this situation (and it’ll show up in three to six months, depending on what happens to Borders), check out the Money sections of my Freelancer’s Guide here on this website to help you collect those debts.  Really what you need to do, as a writer, is limit your own exposure.  If a publisher is having trouble, then don’t let them exercise rights to your book without payment.  It’s that simple and that hard.  (And if you’re a professional writer and you didn’t understand that sentence, you need to learn the business side of your career ASAP.)

Since I’ve already started discussing writers, let’s move to what the changes of the last two weeks mean for writers in general.  Well, you can obsess and stew about Borders, but in the long run, it will make no difference.  (Not just the obsessing and stewing, but the loss of Borders itself.)  Readers want something to read.  They will find books, one way or another.

The (potential) loss of Borders might show publishers once and for all that limiting your retail options to only a handful of bookstores is a really dumb thing to do.  Maybe then publishers will start offering the independents the same kind of discount consideration they offer the chains.  (Some publishers are already doing this.)  Someone will fill the void.  It always happens and it won’t happen any faster just because a group of writers are worrying about it.

The great thing about these changes is this:  Writers can now take control of their own careers.  If you have backlist inventory that you control the rights to, get it in e-book format quickly.  Readers want content right now.  If you don’t know how or can’t do it on your own, find services to help you (and probably not the one provided by those ever-friendly but  ethically challenged agents.  [Folks, it’s a conflict of interest for an agent to be a publisher.  Think about it.  Even if the agent is the nicest guy in the world, that doesn’t make the business  model he’s developing a good one for writers.  I’ll deal more with this in the writer sections of this long series]).

There are many services that can help and offer work on a flat fee basis.  For example, if you can put your book into electronic format, but don’t feel comfortable designing covers, then you can hire someone to design the cover for a flat fee—not a percentage of the book’s sales.  Anyone who is asking for a percentage is charging too much money.  There are many places springing up on the web for these services.  Dean has done a post about the potential scams, while other people have organized websites such as authorsandfreelancers.com that work like the old markets websites, telling you who is available to help, but not vetting those people so buyer beware.  Other organizations function like Bookview Café, which works as a co-op.

Get your backlist up now.

If you don’t have a backlist available to you and you’re a bestseller, just ride through the changes.  You’re with a Big Publisher anyway, and this will all shake out to your benefit.

If you don’t have a backlist available to you because you haven’t been published yet, well, we’ll have a discussion in a few weeks. The topic is too great to cover in a single paragraph.

Finally, let’s discuss the impact these changes will have on the most important group of all—the foundation of our industry, the all important folks without whom none of us would have careers (or an industry at all): the readers.

Oh, readers.  We are in book heaven, and it’s only going to get better.

Yes, I’m annoyed that the only new bookstore within easy driving distance of my house is mismanaging itself out of business.  And I would be furious if that was the only way I could get books.  But I can order paper books from Amazon or B&N or from the publishers themselves.  (Or the writers themselves, these days.)  I can download a book that I want when I want it (even if it’s 2 a.m. and I’m in my jammies).

I have so much to read that I don’t even know where to start.  And once my favorite authors get all of their backlist published electronically, I’ll really be buried.  In a good way.

What the deluge of ebook purchases in the past two weeks has shown me is this: the biggest problem readers have had is a lack of availability of the books the readers want to read.  I don’t know about the rest of you, but I spent years trolling used bookstores to find favorite backlist titles by my favorite authors.  I still do that, but I also check to see if the book is available electronically.  If it isn’t, I go to Bookfinder.com and see if I can order it from somewhere.

It’s fun—and it’ll only get more fun as the years go on.  I’ll be explaining that too later in this series.

But for now, here’s the upshot of this week’s piece: Change is happening quicker than any of us expected.  The next six months should be really dynamic, so pay attention to industry news.  Hang on, because it’ll be a real ride but ultimately, readers (and many, many writers) will benefit the most from these changes.

Next week, I will delve deeper into the impact these changes will have on the midlist writer.  Once I finish with the midlisters (in a week or two or three), then I’ll move to unpublished writers.  And then to readers.

So stay tuned—and stay informed.

My business blog is an example of the changes in publishing.  I have an opportunity provided by technology to go directly to the readers I want to reach, an opportunity that did not exist back when I started as a nonfiction writer thirty years ago.  And another aspect of this change? I ask my readers to participate, either through donations to keep me in tea and chocolate while I’m writing this or through discussion (with me and others on the blog or via links in social media).  Thanks for visiting every week.

“The Business Rusch: Rapid Change” copyright 2011 by Kristine Kathryn Rusch.