The Evolution of Book Publishing; or, On the Trail to Stage Five
by Joseph J. Esposito
With all the turmoil in the book business today, it’s hard to see where the various trends lead. How can a publisher determine where to invest when it is unclear what the emerging marketplace will look like in just a few years? The questions are endless: What is the future of print? Which e-book formats should I support? Is it worthwhile to invest in a complete XML workflow? Do I pursue a channel strategy online as I have in the offline world, or do I concentrate on direct marketing? How can I obtain financing for my company when I can’t even tell my investors and bankers what the business is likely to look like even just a couple years away?
It’s important to try to see through the clutter and to identify some broad trends that seem to lead inevitably in a particular direction. If you get that trend analysis right, you can invest with a reasonable expectation that your business plan and the marketplace will intersect at the right time.
As you may have guessed if you have read my earlier articles in the Independent, my primary interest in publishing is growth. (Well, actually my primary interest in publishing is reading good books, but that is not my day job.) Too much time and energy are spent moaning about lost opportunities and what some recall as the “glory days” of the industry. I happen to believe that more people are reading today—and reading more—than ever before, and the real opportunity of publishers is a growth strategy. The way to get to growth is by coming up with a plausible vision of the future of the marketplace and then to work hard to get there from where you are today. What I will try to do in this article is identify broad and, to my mind at least, inevitable trends in the way books are marketed.
I have broken these trends down into five stages and tracked four variables: venue (where a book is sold, online or off), medium (whether a book is published in print and/or electronically), channel (indirect vs. direct marketing), and unit of sale (standalone vs. subscription).
My assumption is that the growing role of the Internet in the book business means we are going to see old stages or paradigms fall away over time, to be replaced by new paradigms. But paradigms don’t change overnight. Indeed, they often coexist.
Stage One Book Publishing
Twenty years ago, in what I call Stage One, there was no Amazon, no iPad or Google Editions—there wasn’t even a Google—and mobile phones were a rarity. At that time we all worked in print. We acquired books and then sent them into the marketplace as discrete objects, usually to various intermediaries—for example, bookstores and the wholesalers that service stores and libraries. The medium was print; the distribution indirect (that is, through resellers of various kinds); and the entire business was conducted in the world of bricks and mortar.
Virtually everyone working in publishing knows the Stage One world very well—and with good reason, because most publishing is still in Stage One. But we all know that things are changing, and usually not for the better. Libraries, for example, buy fewer books today than they used to, and bookstores are having a hard time competing with online venues. So Stage One is not growing any more and is probably shrinking, but it is still the largest component of the book business today.
Although it is hard to quantify what percentage of total revenue still derives from Stage One, the figure is surely at least 80 percent in the United States and higher in international markets, and I suspect that 80 percent is too low an estimate, despite all we read about the decline and fall of the book business.
Stage Two Book Publishing
About 15 years ago, Stage Two got started. This is the paradigm for online bookselling of print books, for which Amazon is the exemplar. Over the past 15 years, online bookselling has gone from zero to double-digit percentages of publishers’ revenue. Even more remarkably, the growth in online bookselling took place while overall sales were basically flat.
Still, Stage Two closely resembles Stage One in at least two important respects: the products are print, and the sales are indirect. Most publishers work with Amazon in the very same way that they work with Barnes & Noble and Borders. Books are printed and placed in a warehouse. When orders come in, the books are shipped to another distribution facility. Large publishers rarely work directly with the ultimate customer. And despite the fact that the orders are all placed online, using some of the world’s most sophisticated information technology, the product itself is made of dead trees slathered with ink.
For almost every publisher, Stages One and Two are coexisting; together they make up 90 percent or more of total revenue. Most industry insiders expect that Stage Two will grow and that Stage One will continue to decline, but it’s evident that if you are a publisher, you have to operate in both stages at the same time.
The real theme is inevitability, however, and Stage Two book publishing was inevitable the moment in the fall of 1993 when the Mosaic browser was made available at the University of Illinois. Once the Web came into existence, people were going to study it for commercial opportunities; e-commerce was just a matter of time.
The move from Stage One to Stage Two has some interesting implications that all publishers have had to deal with. For instance, bricks-and-mortar stores are anchored in a particular locale, but online bookselling is inherently global. This disrupts the traditional way book publishers have divided up marketing rights: it is no longer convenient to have one publisher handle sales in the U.K., another handle American sales, and so on. The inherently global nature of the Internet puts pressure on various copyright agreements. An online bookstore, even one that sells only print books, is thus more than a bookstore. It is also an agent of disruption.
Stage Three Book Publishing
We are now entering Stage Three—as we inevitably must—and Stage Three promises to be a doozie. Books continue to be sold online, but now the medium has changed: the books include e-books.
This is a pretty big leap, and it comes with enormous challenges. When we went from Stage One to Stage Two, we didn’t really have to muck around with production or the supply chain very much. You could become a Stage Two publisher simply by shipping more books to Ingram, and Ingram and Amazon did the rest. But when you get to Stage Three, well, how do you get your files into the proper format? And what is the proper format?
Think of some of the unprecedented aspects of Stage Three. In just the first month after the launch of its iPad, Apple became one of the top 10 booksellers in the country; for some publishers, Apple is now #3. Kindle sales have strengthened Amazon’s already strong position; for a small number of publishers, total sales with Amazon (both print and digital) now produce 50 percent of total revenue.
We have seen some catching up on e-books from Barnes & Noble, Borders, and Sony, but the next big player is going to be Google, with its Google Editions. It seems probable to me that Google will be among the top 10 venues for books within one year. For e-books, three players—Amazon, Apple, and Google—are likely to control over 90 percent of the market for at least the next year, if not longer—though, it must be said, we should not rule Barnes & Noble out.
There is no known role for bricks-and-mortar bookstores with regard to e-books; once downloads are easy, bookselling accelerates its shift to online services. Stage Three also solves some of the most stubborn problems of traditional bookselling. There is no physical inventory, which reduces working capital requirements. There are no shipping costs. And there are many fewer returns. With those kinds of incentives, the pressure to publish in electronic form was very great.
Most publishers are now either participating in Stage Three book publishing or expect to participate in the coming year. Meanwhile, Stages One and Two are still active, so every publisher is now required to run what are essentially three different businesses. The mistake would be to think that these businesses have more in common with each other than they do.
In Stage Three we have an acute marketing problem: Since people can’t browse in bookstores for e-books, every press has to market online.
Now, some of you will say, Heck! We have been marketing online for years. You pioneers know that online marketing requires new skills and often different staff. Most publishers are now experimenting with Google AdWords, Facebook, Twitter, and heaven knows what other online services to help people discover books. A couple of years ago I posted a message to a mailgroup about something called search-engine optimization. Some people asked me what it was. Now SEO is the single most important marketing tool available to any publisher. This is one of the inevitable aspects of Stage Three, the increasing focus on search engines and Google in particular.
In fact, the focus on search engines began with Stage Two, as publishers began to consider how readers would find their books online. To meet this challenge many publishers began to put greater effort into the creation of metadata, as it is only through metadata (information about a book) that books can have any online presence.
By the time Stage Three becomes a component of a publisher’s marketing strategy, the management and dissemination of high-quality metadata are increasingly important; a book that cannot be found through an online search cannot be found at all. It comes as no surprise that the company that has made the biggest investment in metadata of all kinds is Amazon, which almost always is at the very top of Google’s search results for any book.
Stage Four Book Publishing
By the time we get to Stage Four, metadata will take on new and even more important roles, and the inevitable signs of Stage Four are already emerging. Stages Two and Three began to heighten the need for Web marketing and getting a good page rank in Google. And once book marketers began to understand how to operate in what I call the Google ecosystem, it was clear even to the giant publishers that books would sell directly from a publisher’s own Web site.
This is because Google is a portal-buster. Search-engine results point to the best presentation of information on the Internet, and for books, often the best source of information is the publisher. As publishers work on their own Web sites, they see the Web traffic grow, and they are often surprised to see how many people click on the Buy button.
Direct marketing is inevitable—and for many publishers, it is disruptive. In Stages One to Three, we had intermediaries, but with Stage Four we have disintermediated the intermediaries because search engines make it possible to do so and because disintermediation seems to promise higher margins.
In Stage Four, most of the elements of Stage One bricks-and-mortar bookselling disappear. Print has given way to electronics; physical stores have been replaced by online venues; and channel sales have been replaced by direct marketing.
This is the place to note that smaller publishers are often the most innovative. Indeed, they have to be, as the big guys tend to monopolize the attention of the major players in the value chain. In effect, many independent are moving through the five stages at a more rapid clip than the behemoths of the trade. Paradoxically, with so much change hitting the book business at this time, smaller publishers may be better positioned to take advantage of some emerging capabilities.
Does this mean that a publisher could enter Stage Four and walk away from Stage Three? No. The earlier stages are all important to the overall customer base and a publisher’s revenue stream. But Stage Four is something different; it is a new marketing opportunity. When publishers get to Stage Four, they put themselves in the driver’s seat. They get to control their marketing messages; they get to test different offers; and they establish a direct relationship with customers.
That direct relationship tips us into some complicated policy areas. Direct marketers, whether publishers or late-night appliance vendors on television, share a strategy—collect as much information about customers as possible. This is not the mechanical knee-jerk reaction of a Big Brother, but the deliberate goal of marketers who know from experience that the more information they possess about customers, the more things they can sell.
But what about privacy? There is something unpleasant about discovering that your personal purchasing history, your method of payment, and your ZIP code (perhaps the most valuable piece of information for a marketer) are stored in a marketing database, mined for a vendor’s economic advantage. As consumers we might say, Privacy first: don’t collect any information about customers. But as Stage Four book publishers we might inquire, How many people are in your household, and what is the outstanding balance on your mortgage?
There is no resolution that I am aware of to the tension between privacy advocates (basically all of us in our consumer aspect) and marketers. The publishing world is going to have to come up with a standard for marketing practices and data retention. In the absence of such standards, some publishers will inevitably become less concerned about customer privacy because of the economic opportunity that violating privacy makes possible. It would be unfortunate if the organizations with the smallest regard for personal privacy set the standard for the industry.
Stage Five Book Publishing
Stage Four sounds so good for publishers that you would think we would stop there. The inevitable pressures of technology and the marketplace, however, do not permit stopping. Inexorably, participants in Stage Four will come to see that they have a very big cost in customer acquisition, and they will look for ways to drive that cost down. Enter Stage Five.
Direct marketers know that one of the biggest expenses they have is getting someone to buy from them in the first place. For this reason, they are always looking for ways to sell additional things to existing customers. The challenge is how to extract sale after sale from the same person. This is true whether you are a book publisher or the head of marketing at Apple.
Stage Five is thus the reemergence of the subscription business. This is a radical change. In all the previous stages, publishers were still selling discrete objects, otherwise known as books. But with direct-marketing engines running, they will try to convert one-time sales into ongoing sales.
There are countless ways to do this, and new ideas spring up every day. One established way is simply to collect customers’ names and notify them when a new book by the same author or in the same field comes out. Another way is to get people to subscribe in advance to an author’s forthcoming works—in effect, re-creating the standing-order plan of the library world for the consumer market. But I think that the real developments in subscription-based book services will come about through the creative use of digital technology in ways that we aren’t yet able to imagine.
A couple of things caught my attention recently in this regard.
Not long ago, Amazon announced that if you own a Kindle book that needs a correction or an update, Amazon will make the changes silently over the Internet. Leaving privacy concerns aside, this is interesting because it suggests that Amazon is exploring a subscription model for books. Instead of purchasing (or renting) a book from Amazon, you will subscribe to it, and for that subscription you will get a number of enhancements. It is but a short leap for Amazon to charge for those updates.
Also of interest is a recent acquisition by Apple of an online music service that sells subscriptions to popular music. This comes on the heels of a number of successful online subscription services for music, including the very popular Pandora.
Now what is in Pandora’s box? you might ask. What’s there is a new paradigm: instead of buying music atomistically on iTunes one song at a time, people subscribe to entire libraries. The service is supported by advertising (in effect, it is like a personalized radio station), but perhaps a fee-based premium service is in the offing (this might also remind you of Netflix, which is now streaming movies directly to your computer or digital television on a subscription basis). While many pundits say that the book business is going to move in the direction of the music business, the music business is beginning to look more and more like the magazine business.
Obviously, a subscription model lends itself to aggregations organized by topic. In the academic publishing world, there are many harbingers of Stage Five book publishing, aimed primarily at the institutional market, but publishers with enough titles in a particular category may be able to attract subscribers as well as now-and-again buyers. This will naturally lead to multiple publishers combining their titles to create a large aggregation.
The presence of multiple partners makes it harder for any one press to “own” the customer, which is the point of direct marketing in the first place. Thus the marketing of aggregations is something of a halfhearted strategy toward full Stage Five book publishing.
For subscription publishers, it is better to have a great list in science fiction than two fairly good lists in cooking and military history, so moving to Stage Five will involve some restructuring for large houses with broad lists—yet another reason why the future may belong to David, not Goliath. I wonder when we will regularly see list swaps where Publisher A gives a small list in one area to Publisher B, which is strong in that area, in exchange for a list where Publisher A has depth.
Of course, even as you become a Stage Five publisher, you also have to continue to work as a Stage One publisher, a Stage Two publisher, and so forth. This is the fundamental operating problem for the book business today, the need to straddle multiple business models at the same time. And a mistake here must be avoided. Don’t focus so much on the stages where you already have some revenue that you have no capital to invest in future paradigms. My recommendation is that publishers begin to reallocate some resources now, even if it hurts. It will hurt more when the future arrives and you’re not there.
Joseph J. Esposito is CEO of GiantChair (giantchair.com), which provides direct marketing services to the publishing industry on the Internet. Previously, he headed The Portable CEO, specializing in all aspects and segments of publishing digital media. To reach him, email firstname.lastname@example.org. This article is an expanded version of a talk he delivered at the Association of American Universities 2010 annual conference. A version focusing on university publishing appears in The Journal of Electronic Publishing.