26/06/06

Jason Epstein

I’m reading Jason Epstein’s Book Business, Publishing Past Present and Future in between novels at the moment. It’s the paperback edition, which is important as it has a preface and afterword not originally included in the hardback. The preface to the paperback edition, specifically the first page, convinced me to buy the book. The afterword (’Reading the Digital Future’) is also worth hunting out this edition for.

It’s a pretty astonishing read. It is based on three lectures the author (former editorial director of Random House, recipient of the National Book Award, big publishing chops etc) gave in 1999. Here are some quotes which, in terms of issuing a rallying cry to publishers to self-protect, couldn’t be clearer.

I predict that new technologies would “inevitably” lead – or, more accurately, force – publishers to form a consortium – a combined catalogue – from which to sell books electronically from a single source directly to readers

It has to be said that Mr Epstein has a vision of the future of books very similar to that of Vicky Barnsley (outlined in her speech to the London Business School) – that of kiosks spitting out books from a central database, printing and binding them on demand. I’m not as militant a subscriber to this view as either of these, although I can see it is possible as a convenience. [Talking of which, I have recently noticed the appearance of a novel vending machine in Terminal 4 at Heathrow, near Gate 8, which is where the Eindburgh / London shuttle is based. I have no idea how it is doing, but I can't imagine that well given that most flights leaving the terminal last an hour or less... a flight time barely worth an airport impulse-read, especially now that airlines give out free papers to passengers.]

Readers would then download them onto screens, or, more likely in my opinion, purchase them from machines, now in prototype, that would print single copies on demand at point of sale wherever in the world electricity and an Internet connnection exist, in effect ATM’s for books.

He goes on

a consortium of some sort must eventually replace the present archaic system in which books are shipped physically from printing plants to publisher’s warehouses and from there delivered in bulk [or not in bulk] to wholesalers and retailers where they await buyers until unsold copies are returned to their publishers and destroyed.

And again

The formation of this consortium … will eventually render many traditional publishing functions obsolete, especially thsoe relating to the production, storage, delivery and marketing of physical books. In fact, these new technologies will render today’s vast publishing conglomerates themselves largely redundant. But these technologies will also make books more widely available, less expensive, and more profitable to writers as costs related to physical distribution are minimised or eliminated.

Now this clearly is close to reality – see www.lulu.com - and just lacks a breakout bestseller. I love it when he goes on (I could just type out the whole book),

Shorn of many of their obsolete functions, tomorrow’s publishing firms will be smaller, more improvisational, more likely to take risks, less costly to create and run, and more numerous than the bewildered conglomerates that now overshadow the industry and the writers and readers it serves.

This from a guy who used to run editorial at the biggest of the bewildered conglomerates. The above were quoted from the preface to the paperback edition. Towards the end of the book there is a chapter called ‘Modern Times’ which describes his attempts to break into book retaining (guided by observing shops such as the early Borders and a shop called the Tattered Cover) but which faltered because of the economics of book selling. He identifies the Long Tail,

a large audience existed for the myriad backlist books that could not be found in shopping malls at the time and that publishers were increasingly unable to keep in print … what Tom [Borders] had acknowledged was the familiar trade-off between rent and inventory: high rent demands high turnover and high turnover requires best-sellers.

His foray into retail came about thus:

The prospect of maintaining vast inventories in expensive New York premises and hiring trained clerks at New York wages discouraged Mort and me from pursuing our idea. We felt that inevitable high-rent versions of the Tattered cover or Borders in amjor cities would develop into mall stores on a larger scale, dependent on rates of turnover incompatible with very large, slow-moving inventories… I decided instead to create a virtual bookstore – the Tattered Cover or Borders in the form of a direct-mail catalog, an annotated directory of thousands of backlist titles that could be ordered by phone over a toll-free number. The result was The Reader’s Catalog, a two thousand-page list of more than forty thousand titles, as many as could be included in a direcdtory three inches thick.

The directory was, he says, ’self-explanatory’ and sold at $25. Computers were linked to wholesalers’ systems, orders fulfilled within 24 hours, and they discovered that ‘a potentially vast worldwide market existed for the great variety of backlist books that could not be found in the mall stores and were otherwise available only in the few large independent stores serving local markets to which most Americans had no access.’ The Reader’s Catalog ‘would become… what Amazon.com has become.’

At the risk of going well beyond fair usage, the next bit was another insight I found invaluable,

I had miscalculated: I expected that the catalog could operate profitably on the 40 percent margin between what we paid the wholesaler and what we charged the customer together with the shipping and handling charges that the customer also paid. I was wrong. Though we shipped orders as soon as books arrived in our warehouse from the wholesaler, the handling costs, clerical salaries, and computer and credit card charges were more than I had budgeted for. I expected that as the business grew these costs as a percentage of sales would decline. Instead, as we added more staff to handle increased sales, I found that our margin would be insufficient no matter how the business grew even though we had the advantage of immediate payment from our customers and thirty days to pay our supplier and were increasingly ordering books directly from publishers at greater discounts.

The problem was not a matter of size. It was structural. Though we kept no inventories, had no retail premises, or salespeople and received payment in advance, a $25 or $30 average order simply did not produce enough margin to cover the cost of handling it, and never would no matter how big the business became, for the more we grew the more infrastructure we would need to serve our expanding customer base.

At the same time, he notes, the malls (selling the ‘head’ of the long tail titles – the blockbusters) reached saturation point and were sold off; their new owners and investors required more aggressive growth than was currently being met. And in parallel to this, the out-of town ‘long tail’ shops (aka those with ‘backlist inevntory’) were attracting customers in large amounts to their outlets, which had dramatically lower rent. As a result, the purchasers of the malls also bought in to the longtail – then in the form of Borders – with a view to rolling out the book ’supermarkets’ nationally. But – critically to Epstein’s endeavour – these supermarkets indulged in price wars and high discounts to attract customers, and shredded his already fragile margin.

Many of these superstores, under pressure to increase their margins, thinned their inventories, and, like the mall stores, featured current best-sellers and their own self-published editions… at the expense of their strong backlist inventories that had been their original emphasis. This put them at a disandvantage compared to Internet retailers. The viability of the superstore chains, under pressure from Internet retailers and facing an even more severe electronic challenge in the futre as authors and readers are linked electronically, is questionable. Meanwhile, the chains, seeking to improve their fragile margins, exert increasing pressure on pubilshers to gamble on potential best-sellers and provide incentives that amount to additional discounts. Publishers and booksellers did not choose this dance of death, but neither partner can escape the other’s embrace.

For a start, the reason I am quoting at such length here is because it is still relevant. This was written in (I think) in 2001 and his description of the above is not irrelevant today.

Enter the web. Epstein describes his failed joint venture with Prodigy, ‘an Internet shopping service’ using the Reader’s Catalog, and blames their technicians for focusing on the best-sellers rather than the backlist. He then sums up one view (and not one I wholeheartedly share) of publisher’s web sites,

publishers were creating their own web sites, but only had vague ideas of how to exploit them. The results were negligible. Publishers were reluctant to sell their titles directly to consumers even at full price, much less at competitive discounts. Moreover

and this is the point to which I am not convinced,

readers were not interested in reading a Random House book or a HarperCollins book any more than moviegoers want to see a Paramount or a Fox film. Publisher’s experimental web sites were an expensive dead end. As the success of the Tattered Cover showed, readers wanted a single inventory from which to choose their books.

Enter Jeff Bezos.

We decided to auction the right to use the [Reader's] catalog’s updated annotated listings to an existing internet retailer. The leading candidates were amazon.com and barnesandnoble.com… we showed [Bezos] the even worse projections … if we turned to the internet. Bezos brushed these numbers aside and said that according to his projections he would cover his fixed costs when his sales reached $200 million. Bezos did not see that he was committed to an incorrect business model, one in which costs would rise in proportion to sales while margins would remain under constant pressure from competitive discounts and high service charges. Three years after this meeting, Amazon.com had lost nearly $900 million… ecommerce is not exempt from the rules of accounting.

And this bit I love

Online commerce rewards unmediated transactions between producer and consumer.

Epstein goes on to celebrate how Amazon.com, and barnesandnoble, lost gazillions of dollars just as he predicted they would. He accepts that Amazon’s bookselling division broke even only with the caveat that this may have been due to the ‘reallocation of overhead costs from books to other low-margin product lines… than enhanced overall cash flow’. He suggests that Amazon has acquired a large customer base at huge cost, but that this customer base is equally likely to leave amazon for another retailer should they offer ‘better service, even lower prices’ or eve,, ’should amazon conclude that it can no longer afford to support customers who demand goods and services for which they are not asked to pay’.

I’m not sure I’m getting to a point here, but I’m going to go on quoting.

It was obvious to many in the industry that Amazon could not overcome the stuctural problems that defeated the readers Catalog. But a possible alternative was also obvious. If publishers formed a consortium to sell their books directly to readers over the internet, the logic of internet marketing, to which middlemen are extraneous, would be acknowledged and the problem of insufficient margin would be overcome. What I had in mind was a consortium open to all publishers, old and new, large and small, on equal terms.

and this is where he loses it a little bit

The elimination of wholesalers and retailers would permit the consortium’s component publishers to reduce prices to consumers, pay higher royalties to writers, and increase their own margins. To the extent that books are sold by the consortium directly to consumers, the problem of returns from over-stocked retailers would also be eliminated.

The concept of such a consortium was simple. To implement it proved impossible. Though the Internet made such a consortium sooner or later inevitable, the conglomerate managers to whom I presented the idea were not enthusiastic, nor was Jeff Bezos [!] when I suggested to him that a solution to his problem of insufficient margin might be to convert Amazon from a retailer to a brokerage, transmitting orders for a fee to a publisher’s consortium, if one could be arranged.

I’m going to end this there, with a reference to a post today by GOB which includes the following statement which seems at least worth repeating alongside the above,

I used to think that it would be catastrophic if Amazon failed to make profits and collapsed. But I no longer feel so worried. I’m not sure, frankly, that Amazon ever has made profits, but if it did go down the tube (and going on diversifying for ever and ever seems a good way to bring it about), then I think others would step into the gap. Very willingly, actually. Tesco, anyone? Or see below re Play.com.

Posted by Peter Collingridge in Future of the book, Publishing.

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