Last Year’s Model
A friend of mine is a business consultant. A damn good one too.
About ten years ago we went out for a couple of beers so that he could ask me my opinions about the state of the book publishing business. He wanted to know where I thought it was heading. What global strategic initiatives would I recommend he investigate for a “blue sky” presentation he was putting together? He and his partner had been put on retainer by a very powerful figure in the business (the head of one of the big six publishing companies) and were asked to look at it from the outsider’s point of view.
The Big Kahuna wanted to know what my friend would do if he were thrust into the position as head of a privately held book publishing behemoth? He was told to plan as if he wouldn’t have to worry about kowtowing to shareholders and he’d have the full support of the conglomerate’s board of directors. Assuming he could do anything he wanted, what course would he set? What would he do to a) increase profit margins b) secure the foundation of the business from the publisher’s point of view and c) prepare the company to take a leadership position in the inevitable digital revolution?
It was 2003.
At that time, I was the publisher of a small company called Rugged Land Books. It was one of those periods that you rarely experience in life when years of preparation and planning somehow perfectly align with a particular sliver in time.
For years I thought that the big six were ignoring large bandwidths of the book buying marketplace. So I set out to create the books that these niches would embrace. Keep in mind that no matter what anyone tells you, book publishing has always been in the niche business—even in the bestseller category. Compare the sales of a mass product like an iPhone (approximately 200 million sold) to the biggest book successes in the past decade (10 million units approximately for The Da Vinci Code and The Help) and you’ll see what I mean. Most books sell less than 5,000 copies.
Rugged Land’s first list was extraordinarily successful. Of the first four titles, two were New York Times hardcover bestsellers (one in fiction, one in nonfiction), one would become a backlist bestselling sensation (The War of Art) and the other had been optioned in a seven figure deal in Hollywood. Interest in Rugged Land was so high that I was able to auction off paperback reprint rights to imprints of the big six to all four titles (kind of unheard of then, and even more unlikely today). That dizzying launch put the company in the black in its very first year of operation.
[Looking back, I should have taken a page from Barry Sanders. I should have closed shop right then and there and left the field at the top of my game!]
I’ve since learned that it’s a good idea to write down what you’re thinking when things are going well. When you have mojo going, you can’t help but think that you’ve finally reached that dreamed of “sweet spot” in life. The 10,000 hours of hard work and dedication have finally paid off. Your long held visions will not only become reality, but you are now in the zone of “can’t miss.” Sure you’ll have setbacks, but your core beliefs are right on the money. Fear not! Believe in your omnipotence!
Needless to say, these kinds of moments of clarity are short lived and often delusional. As Bruce Springsteen has written, “there are things that’ll knock you down, you don’t even see coming.” But when you are riding a wave of self-confidence, do yourself a favor and document your ideas. The crazier the better. Just don’t act on them. Let them percolate and mature until their time comes.
Here’s what I thought my friend should address back in 2003.
At the time, the biggest threat to the big six was the expansion of the retailer Barnes & Noble into proprietary publishing. Since 1992, B&N had been eroding big publishing’s stranglehold on the cash flow generated by the classics—public domain books like Pride and Prejudice, Huckleberry Finn, The Scarlet Letter, A Tale of Two Cities etc. Barnes and Noble began to sell these same titles under their own imprint with a more expensive format (hard cover) for less than publishers’ traditional mass market offerings. Plus they put their own editions in front of consumers eyes’ with prime display spots throughout the store, and buried the Penguin Classics and Bantam Classics deep in the “fiction” shelves.
Barnes & Noble is able to do this because they do not have to solicit orders from third party retailers. They already have access to book buyers. They don’t need other booksellers to carry their books to reach them. But when a big six publisher publishes a book, they don’t have direct access to consumers. Instead they have to ask retailers to stock their titles. To do so, they grant a traditional 50% discount on the retail cover price to their retail customers. The retailers then make their margin on the difference between what they sell the title for and what they paid for it.
So, if Barnes & Noble orders a $20.00 book from Random House, they are required to “pay” $10.00 to RH to carry it in their stores. (There’s a whole other level of accounting that benefits the retailers that has to do with their ability to return unsold titles for full credit, but I won’t get into that here). They can then sell the book for $20.00 and receive the same gross revenue as the publisher $10.00. Or they can discount the title to entice the consumer to buy the book and still generate a healthy per copy revenue stream. The ultimate price to the consumer is completely up to them.
But when a retailer sells their own books, not Random House’s, they do not have to pay $10.00 a unit to bring a book into their stores. Rather they can pay a printer $1.25 a unit to print a classic and charge $11.25 to the consumer rather than $20.00 and still make the same margin. B&N ran with this model and drove prices all the way down to $3.95 in some cases, beating the big six classic lines into submission.
Remember, this is all pre-EBook.
In 2003, B&N announced that it was buying Sterling Publishing (an independent publisher that had been in the business since 1949). Sterling was not in the business of competing for frontlist bestsellers, rather they specialized in the meat and potato backlist variety of books—the unglamorous ones that sold month after month and year after year to hardcore niche followings. The big six worried that this development would suck even more revenue out of their bottom line. The truth is that the pot of money that pays for big publishing’s million dollar advances to first thriller writers comes out of the backlist revenue generated from books like “How to grow Geraniums.”
The “sky is falling” riff at that time (and there is always some impending doom on the horizon in publishing) was that B&N was aggressively positioning itself as a major publisher as well as the preeminent retailer. The big six suspected that they were in danger of losing the life blood of their business model—cash flow from their long tail backlist. [“The Long Tail” was coined by Chris Anderson and it is the phenomenon of a mass of different products selling small numbers of units as opposed to a small number of products selling mass quantities.]
Does any of this sound familiar?
So what did I tell my friend to recommend to the masters of the book universe in 2003? Like the combative Black Irish troublemaker that I am, I told him that the big six should go to the mattresses.
For those of you unfamiliar with the expression, it comes from Mario Puzo and Francis Ford Coppolla’s masterpiece The Godfather. When a rival crime family threatens to take over another’s territory, the foot soldiers’ for each family “went to the mattresses.” They’d all hole up in an undisclosed location that could be well protected and slept on mattresses while waging their street war.
In the movie, after his father the Don is shot, Michael Corleone (Al Pacino) recognizes that the only way to safeguard his family is to fight. So he seizes the vacant patriarchal power position by suggesting he assassinate a high ranking gangster and his bodyguard, a decorated New York cop (played by the brilliant Sterling Hayden).
This from the screenplay:
Where does it say that you can’t kill a cop?
HAGEN (the family counselor played by Robert Duvall)
Come on, Mikey…
Tom, wait a minute. I’m talking about a cop—that’s mixed up in drugs. I’m talking about ah—ah—a dishonest cop—a crooked cop who got mixed up in the rackets and got what was coming to him. That’s a terrific story. And we have newspaper people on the payroll, don’t we, Tom?
[Hagen nods in the affirmative]
And they might like a story like that.
They might, they just might…
After I did my best Al Pacino impression, my friend looked at me like I was Crazy Joe Gallo.
“What the hell are you talking about?” he asked.
“Are you familiar with Orbitz?” I said.
“Sure, that’s the new plane ticket service that the top airlines started up to compete with Travelocity. The big airlines were losing margin on their tickets to the upstart so they came together…each kicked in some dough and they started a competitive online retailer…what about it?”
“Where does it say that a publisher can’t be a retailer? Why don’t the big publishers do what Barnes & Noble is doing to them? Turnabout is fair play.”
“Uh, well smart guy, there are a bunch of laws on the books about monopolies and
“My friend, we aren’t living in the New Deal. We’re living in the era of deregulation. They just repealed the Glass-Steagall Act for crying out loud. Do you think Barnes & Noble worried about the Sherman Anti-Trust Act when they started their own publishing operation? A kid straight out of law school could defend them from that. What Congressman or judge would even care about the book business anyway?”
“Okay, so you’re saying that the big six publishers should all kick in like 20 million dollars each and start up their own chain of bookstores? Dude, that’s nuts. Do you have any idea the amount of work that would take? And how many small independent bookstores would freak out about that? Not only would that be lawsuit city from the ABA, it would piss off B&N such that they’d slash orders to the bone. I see balance sheets drowning in rivers of red for at least five years.”
“I have one word for you. ‘Borders.’ Everyone knows how desperate Borders is to find a buyer. They already have the leases and the stores in place. They are a vital piece of the retail business. What if the big six came together and “saved” Borders? They don’t ‘take over’ Borders, they “bail it out” with a major capital investment that gives them preferred voting shares and allows them to bring in their own management? That’s a good story, right…”how the big publishers joined forces, saved jobs and kept books vital!”? And they could brand the stores with sections devoted to each of their offerings…can’t you hear your wife saying to you…I’m going over to the Simon and Schuster boutique, meet me at the Macmillan store after you’re done at Penguin.”
“That’s never going to happen. Too many cooks, too much risk. That scenario is a non-starter.”
“Yeah, you’re probably right. Too much money at stake. Too many moving parts… I guess you’ll just have to recommend that they do the obvious thing.”
“Yeah, that’s the first thing I came up with.” My friend looked at his notes, “here it is…number one…Take a page from upstart amazon.com and start selling your books directly to consumers, build your own marketing database and connect buyers with your authors.”