masthead.annualmeeting2010

Stage Five Book Publishing

A draft of a presentation for the AAUP, June 2010

Joseph J. Esposito
CEO
GiantChair
espositoj at giantchair.com

The topic of sustainability keeps coming up in all discussions of scholarly communications, but I must say that I think it is the wrong question.  Sustainability implies stasis, but what we need is innovation.  It is very, very hard to make economic sense out of anything that is not growing.  Let's stop talking about sustainability and start talking about growth.

What I would like to do today is provide a framework to help us look for areas of growth.  This presentation is not going to pay the bills for any university press; it is not going to get a more generous allocation of funds from any university administration; it is not going to get the open access advocates to leave you alone; and it is not going to get people or libraries who have stopped buying your books suddenly to jump up waving a checkbook in your faces.  What I hope it will do, however, is describe some trends, trends that I believe are inevitable, and suggest ways to align scholarly publishing with those trends, the better to reap financial gain from them.

The real point I want to emphasize is inevitability.  Much of what I want to say is obvious, but it is the link between some obvious points, the inevitable link, that is important.  If we have a good idea of the inexorable forces of the marketplace, we can align ourselves with that direction.  This is the path to a sustainable strategy:  Determine what the future of book publishing will look like and then work to get there before anyone else.

Let's begin by thinking about how we conducted the scholarly book business twenty years ago; we can call those practices Stage One.  Twenty years ago 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, after extensive editorial review, and then sent them into the marketplace as discrete objects.  For the most part we sent books to various intermediaries--for example, bookstores and the wholesalers that service 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.

Almost all the people in this room know the Stage One world very well--and with good reason, because most university press publishing is still in Stage One.  This is not a criticism of university presses; almost all book publishers of every kind have most of their revenue coming from the Stage One paradigm.   But we all know that the elements of that paradigm 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 university press world today.  To quantitfy this, I would say that Stage One comprises 60 to 75% of the business of most presses today.

About 15 years ago, Stage Two got started.  This is the paradigm for online bookselling of print books, for which Amazon is the avatar.  Over the past 15 years, online bookselling has gone from zero to 25% or more of university press revenue.  Even more remarkable is the fact that this growth in online bookselling took place while overall sales were basically flat.  As dramatic as this change has been, however, Stage Two still 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.  Rarely does the publisher 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 in this room, Stages One and Two are coexisting; together they make up 95% or more of total revenue.  Most people expect that Stage Two will grow and that Stage One will continue to decline, but it's self-evident that if you are a publisher, you have to operate in both stages at the same time.

I said that the real theme is inevitability, 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; ecommerce was just a matter of time.  I was at Encyclopaedia Britannica at the time, and by 1994 we were selling online subscriptions and were considering creating an online bookstore based on the Britannica bibliographies.  Amazon was still a couple years off.  I have been told, but have not been able to confirm, that Amazon was not the first but the thirtieth bookstore on the Web.  Amazon, in other words, was not a black swan, a statistically improbable event, but an inevitable development of the Web.

We are now entering Stage Three--as we inevitably must--and Stage Three promises to be a doozie.  In Stage Three we continue to have books sold online, but now the medium has changed:  the books are ebooks.  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 in the first place?

We should pause and think of some of the unprecedented aspects of Stage Three.  In just one month after Apple launched the iPad, Apple became one of the top 10 booksellers in the country; for some pubishers, Apple is now #3.  Kindle sales have served to strengthen Amazon's already strong position; for a small number of publishers, total sales, both print and digital, with Amazon are now 50% of total revenue.  We have seen some catching up with ebooks from Barnes & Noble and Sony, but the next big event will launch any day now:  Google Editions. It seems probable to me that Google will be among the top 10 venues for books by year-end. For ebooks, three players--Amazon, Apple, and Google--are likely to control over 90% of the market for at least the next year, if not longer.

Stage Three was inevitable; in fact, many people have wondered why it took so long for ebooks to take off.  In my view, the necessary ingredient was always ubiquitous, inexpensive broadband, as high bandwidth moves the information industry from atoms sold in the physical world to the realm of downloads.  There is no known role for bricks and mortar bookstores for ebooks; once downloads are easy, bookselling accelerates its shift to online services.  Stage Three also solves come of the most stubborn problems of traditional bookselling.  There is no physical inventory, so there is little cash tied up in inventory.  There are no shipping costs.  And there are no returns.  With those kinds of incentives, the pressure to publish in electronic form was very great.

Everyone in this room is now either participating in Stage Three book publishing or expects to 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 ebooks, there is a new marketing challenge, and that requires every press to begin to market online.  This requires new skills and often different staff.  Most of the presses represented here are now experimenting with Google AdWords, Facebook, Twitter, and heaven knows what other online service to help people discover books.  A couple years ago I posted a message to a mailgroup about something called search-engine optimization.  Some people asked me what it was.  Now SEO, as it is known, 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.

I am insisting on the inevitability of each stage because I want to make the point that 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.  Once a marketer begins to understand how Google works--what I call operating in "the Google ecosystem"--it is just a matter of time before it becomes apparent that it is possible to sell books 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.  You see this every day when you do a search for a news item.  Instead of being brought to the home page of the New York Times, you are brought to a page deep within the Times's site, where the relevant article appears.  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.  A comprehensive description of a book is the equivalent of a well-crafted story in the Times.

Direct marketing is inevitable, and it is disruptive.  In Stages One to Three, we had middlemen, but with Stage Four we have disintermediated the middleman because search engines make it possible to do so.  By the time we get to Stage Four, most of the elements of Stage One, bricks-and-mortar bookselling, have disappeared.  Print has given way to electronics, physical stores have been replaced by online venues, and channel sales have been replaced by direct marketing.

Some of the presses represented here are already experimenting with Stage Four bookselling, and many have been surprised by the result.  Typically, people challenge Stage Four by saying, Why won't people simply go to Amazon?  The answer lies in the evidence:  in fact, many people do not go to Amazon, even when the price is lower there.  There may be several reasons for this:  loyalty to publishers' brands, especially in the not-for-profit sector; laziness (sometimes even one more click is one too many); and perhaps exceptional merchandising online by the publisher.

Does this mean that a press could enter Stage Four and walk away from Stage Three?  No:  the earlier stages are all important to the overall customer base and a press'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.  The get to control their marketing messages, they get to test different offers, and they establish a direct relationship with the customer.

Stage Four sounds so good for publishers that you would think that they would stop there.  The inevitable pressures of technology and the marketplace, however, do not permit this.  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 single biggest expenses they have is getting someone to buy from them in the first place.  For this reason, direct marketers are always looking for ways to sell additional things to customers that they already have.  I want to make an important distinction here between libraries and publishers.  Libraries are interested in the life cycle of a publication, which is why they properly put so much emphasis on preservation.  Publishers, however, are interested in the life cycle of the customer.  The challenge is how to extract sale after sale from the same person.  This is true whether you are an academic 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 stages up to now, publishers were still selling discrete objects, otherwise known as books.  But once they get their 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 way is simply to collect customers' names and mail 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 won't be able to imagine until someone invents them.

Let me mention a couple things that have gotten 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.  Some people found this to be disturbing, as it gets into the hard realm of privacy policy.  But it also suggests that Amazon is exploring a subscription model for books.  Instead of purchasing (or renting) a book from Amazon, you subscribe to it, and for that subscription you get a number of enhancements.

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 the success of a number of 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 selling music atomistically on iTunes one song at a time, people subscribe to entire libraries for a fixed monthly fee.  This might also remind you of NetFlix, which is now streaming movies directly to your computer or digital television on a subscription basis.  I cannot help but remark on the irony that so many pundits say that the book business is going to move in the direction of the music business, with massive piracy and the equivalent of Apple's iTunes.  Meanwhile, the music business is beginning to look more and more like the traditional magazine or journals business, except that the products are delivered online.

I am predicting that everyone in this room will become a Web marketer, a direct marketer, and a manager of a subscription service in the coming years.  If you are thinking about sustainability, the time to begin working on these things is now.  Look forward, not back; think innovation, not preservation.

It will be apparent to everyone that a subscription model lends itself to aggregations that are organized by topic. Some of the current projects in the university press world are thus harbingers of Stage Five book publishing, though they are mostly aimed at the institutional market, not to individuals.  If you have a collection of titles in, say, political science, you can find all the political scientists and try to attract them to your service.  One problem with this model, however, is that only a handful of presses have enough titles in any one category to attract enough subscribers.  This naturally leads to having multiple presses combine their titles in order 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.  That doesn't mean that it is not useful, but it would be a mistake to stop there.

I expect that Stage Five will result in some restructuring of university presses.  Most presses have fairly broad lists; it's not uncommon to find 10 or more categories represented on a single list.  In moving to Stage Five, publishers are likely to work in fewer areas--perhaps only a single area--in order to have the depth of selection that makes subscription marketing effective.  I wonder when we will see the first list swap, where one press gives another a small list in one area where the latter press is strong in exchange for a list where the first press has great depth.  For subscription publishers, it is better to have a great list in economics than two fairly good lists in sociology and European history.  Of course, getting the oversight board of a press to approve such a restructuring will not be easy, but the presses that successfully make this transition are those that will be sustainable tomorrow.

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.  But there is a mistake here that must be avoided, and that is to 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 you begin to reallocate some resources now, even if it hurts.  It will hurt more when the future arrives and you did not get there first.

I am looking forward to someday becoming a subscriber to a university press.  It is inevitable.

Stage 1

Stage 2

Stage 3

Stage 4

Stage 5

Bricks and mortar

X

Print

X

X

Indirect or channel sales

X

X

X

Discrete object (a book)

X

X

X

X

Online

X

X

X

X

Digital product (ebook)

X

X

X

Direct marketing

X

X

Subscriptions

X

[second draft, June 5, 2010]

View the slides accompanying this presentation