Paper or Plastic? Publishing in the Age of eBooks
by Tony Gamino
November 19, 2007. For the book publishing industry, especially the “Big Six,” this date marks the beginning of the end of a business model dating back over one hundred years. On this day Amazon began selling the Kindle, the first-generation of its wildly popular eReader products. At the time, few in the book publishing industry could have guessed that their Trojan Horse would come in the form of an awkwardly-shaped plastic device with a six-inch, low resolution screen, selling for what was then an astoundingly high price of $399. Since then, the response of the “Big Six” has included collusion, consolidation, and a lack of foresight in regards to innovation (despite a bold move by one company into self-publishing), reflecting an aging industry driven by fear and incapable of the nimbleness necessary to adapt to a game-changing disruptive technology like the Kindle.
To fully comprehend the effects that Amazon and the Kindle have had on both the revenues and the influence of the “Big Six,” it is first necessary to briefly survey the history of book distribution. Two models of distribution have long dominated the book publishing industry—the wholesale model and the agency model. In the wholesale model, the publisher [i.e. a member of the “Big Six”] sells the book, in either print or digital format, at a fixed price to the distributor [an online retailer like Amazon.com or a traditional bricks-and-mortar bookstore]. In turn, the distributor is then free to set the price it charges the consumer. In the agency model, the publisher sets the retail price and the distributor receives a mutually agreed-upon percentage, a model clearly favored by publishers.
The wholesale model favors Amazon because it gives the company greater leverage to set book prices at a lower rate than those charged by the publishers, often taking a loss on the sales of both the e-books and the eReader in order to build customer loyalty. As such, consumers come to expect the lower prices, the consequences of which have a deflationary effect on the entire industry (Filloux). Because of the company’s scale and diversity, Amazon is able to make up the loss via higher margins on sales of other products. Book publishers do not have this option as a means to regain lost revenues. Subsequently, Amazon was quickly able to capture roughly 90 percent of the e-book market. However, since 2007, with the release of Barnes & Noble’s Nook and Apple’s iPad and iBooks app, Amazon’s share of the market has fallen to around 60 percent in 2012.
This drop, however, was not due simply to an overcrowded market. In August of 2011, a series of legal actions commenced (Auletta) culminating in the US Department of Justice charging five of the “Big Six” (Random House being the lone exception) of working in concert with Apple to secretly “raise the cost of e-books, causing consumers to pay tens of millions more than they would have otherwise” (Bosman). While denying any malfeasance, three of the five publishers charged (Hachette Book Group, Simon & Schuster, and HarperCollins) settled with the Justice Department while Penguin and MacMillan, along with Apple, continue to fight the ruling (Bosman).
The expected result of this decision by the Justice Department is that Amazon will soon lower the prices of its e-books, adding insult to injury for the “Big Six,” who will surely see both their margins and reputations take equal hits given the admission of guilt implied by the settlement.
As a means of circling the wagons, two of the “Big Six” (Random House and Penguin) have recently announced plans to merge. Other than simply getting bigger, what steps can the publishers take to compete with Amazon and to adjust to consumers’ changing reading habits? Simon & Schuster believes it has found at least one way.
Recognizing its diminishing clout and borrowing a cue from Amazon’s Kindle Direct Publishing system, Simon & Schuster has tapped self-publishing as a means to shore up declining revenues and discover new writing talent. The company became the first of the “Big Six” to enter self-publishing when it joined forces with Indiana-based Author Solutions, which boasts 150,000 authors and over 190,000 titles in its library. Moving into self-publishing is a necessary step for Simon & Schuster and the rest of the “Big Six” given the continuing disintermediation of publishers. As David Streitfeld of The New York Times notes, “The only really necessary people in the publishing process now are the writer and the reader … Everyone else who stands between those two has both risk and opportunity.” One risk of self-publishing is that, while there is a lot of writing talent just waiting to be discovered and signed, it can be difficult to separate the wheat from the chaff, and Simon & Schuster risks damaging its brand by being associated with subpar writing. This concern is amusingly noted by The Huffington Post UK’s Django Wylie when he insists that “Literature is going to Hell in an Amazon shopping cart.” It will be interesting to see if the rest of the “Big Six” move into self-publishing given the industry segment’s risks and rewards. An ironic twist to this story worth noting is the fact that Author Solutions was purchased in 2011 by UK-based Pearson PLC, the parent company of Simon & Schuster competitor Penguin (Kaufman).
One initiative the “Big Six” could and should implement is the distribution of more rich media content on tablets, for which they could charge a higher premium. They have exhibited up to now, however, a clear lack of understanding regarding the potential of this new medium. In an article on Wired.com dated April 9, 2012, HarperMedia’s Ana Maria Allessi perfectly sums up the industry’s current state of innovation by admitting “We are still sort of creating radio for TV.”
Delivering an exciting and well-executed rich media product does not guarantee success, though, as evidenced by the recent failure of News Corp.’s digital newspaper The Daily. Further, the “Big Six” face increasing competition in the digital space from start-ups like Brooklyn-based The Atavist, producer of “multimedia storytelling for various electronic devices.” The Atavist recently won the financial backing of two of entertainment’s most powerful players, Barry Diller and Scott Rudin.
It is unclear whether or not the “Big Six” have the intellectual resources within their walls to execute the next big thing in books. The companies’ histories include questionable business practices, poor leadership, and myopic vision regarding innovation and change. These facts possibly chart the “Big Six” as merely diminishing stars in Amazon’s ever-brightening universe.