As someone who’s had no
experience whatsoever in owning or managing or even just working in a small,
independent Australian publisher, I must say it feels a little odd for me to
have been invited by Tim and Zoe to give this keynote address – just a week
ago! What on earth could I offer you that would remotely be of interest or help
at this very critical time?
I spent my whole publishing
career - 36 years in all - working in the large global corporates, McGraw Hill
and Wiley. Most of that time in senior executive positions.
But I think I bring a
perspective now that may resonate. I’ve been thoroughly liberated from the Man!
Thoroughly liberated from the groupthink, from the siege mentality, from the debilitating
defensiveness, that plagues all thinking within the large corporate entities
that dominate the publishing industry globally as well as, naturally, here in
Australia.
The publishing industry,
right now, is in a very funny place. We are in the throes of a digital
transition that is radically challenging our traditional operations,
structures, habits of mind and very identities. This is not news to anybody.
My contention, however, is
that we seriously misdiagnosing this challenge, and adopting strategic postures
to deal with it that are thoroughly wrong-headed.
I want to start with a few
observations about the Penguin Random House merger, as a lead-in to the central
thrust of my argument. There’s been a lot of very thoughtful stuff written about
this merger, and I don’t want to rehash that.
I would say firstly though
that, contrary to my claim above that we’re wrong-headed about the way we’re
dealing with the digital challenge, this merger is absolutely right. It’s the
start of something good and necessary.
Let me make the observation
however that the experience of bedding down this combined operation is going to
be terribly stressful and painful for the entire global staff of both Penguin
and Random. I really feel for them. They
are in for a world of pain. This is what
I wrote in a recent blog post:
In my experience it is a far better
outcome for everyone involved if companies are acquired rather than 'merged'.
An acquisition means there is clarity around who is in charge, i.e. who sets
the agenda and who has to give way; whose policies and processes take
precedence; whose jobs will likely go. A merger means constant, ongoing political infighting at every level
over things large and small.
So many senior staff will be spending
most of their time in meetings and conference calls 24/7, that is, internal
navel-gazing, that the core objective of the business - competing in the fast
changing marketplace - will get far too little attention. The whole entity will
suffer. This is so predictable and usually beyond the capability of management
to prevent.
As well, morale generally hits
rock-bottom. The people who win - who survive or get additional
responsibilities - are universally the smooth and political, those who can best
game the system.
Overlay onto
this process the all-pervasive and negative effects of globalization - the
rationalisation of structures, systems, policies, processes and
responsibilities across the globe - and you get a real and irreversible
leaching of energy and competitive urgency from local, country-based operations
like those in Australia. Australian subsidiary companies are very susceptible
to this process: they are large enough to be respected, but not large enough to
be critically important.
Henry
Rosenbloom recently wrote in his blog that the Penguin Random merger was really
nothing of the sort. It was a takeover in all but name. I agree. What we’re
actually seeing is a slow-motion takeover of Penguin by Random House.
And we will
undoubtedly see more, most probably over the next year or so. HarperCollins
will acquire Simon and Schuster or possibly Macmillan, and Hachette will
acquire the other one. This is a logical and rational process, an inevitable
outcome, because of what’s driving it.
Imagine for a
moment the enormous advantages these mega-publishers will garner. They can
afford to invest in very sophisticated software systems across all areas of the
company including editorial, composition, production and distribution; they can
contract cheaper printing; and squeeze suppliers of everything until their pips
squeak. And they can even say to Amazon: ‘Your ebook discount is now 30%, not
50%. Live with it.’
The industry,
worldwide, is undergoing a massive revenue subsidence. Print revenues are
shrinking (despite the uptick in the first nine months of 2012 mainly because
of the Fifty Shades of Grey and The Hunger Games phenomena). In the US
in 2011 hardback revenues were down 17.5% over 2010, and paperback revenues
down 15.6%. In the UK total revenues were down 11%. We don’t have such precise
figures in Australia but we all know anecdotally how depressing things
generally are and how badly the collapse of Borders hurt the industry.
The very
welcome strong growth of ebooks has ameliorated this situation – they now
represent 26% of total trade sales in the US and a bit less in the UK - but the
logic of lower-priced ebooks means more units but less revenues.
Thus the
industry has no choice but to cut its traditional overheads by at least 15 -
20% to maintain profitability and continue to attract investor capital. The
best way to do this is to radically cut duplication, and the best way to do
that is for players to acquire, merge or partner. This is creative destruction
at its best, and the book trade has seen it many times over the last 100 or so
years.
In the 1920’s
heavily discounted bestsellers began to be sold in non-traditional retail
outlets like grocery and department stores; In the 30’s and 40’s book clubs
subsequently emerged and prospered; by mid-century public libraries were rapidly
spreading under new government funding initiatives, bringing free access to books
to millions of patrons around the world; then the paperback was invented. Now
it’s the ebooks revolution.
What is
common to all these major disruptions? The offer of lower prices and vastly
improved access, and the enthusiastic reader response.
We have our
own rather significant circumstance in Australia – the dramatic strengthening
of the Australian dollar over the last decade - which is putting downward
pressure on prices. Australian publishers, distributors and others involved in
importing have lowered prices by 10-15% over the last few years under
competitive pressure, but this is nowhere near enough. Prices should have been
lowered by around 30% to meet consumer expectations and to fend off Amazon, but
of course this adds considerably to revenue decline unless there’s a far more
substantial, i.e. around 50%, increase in volume. And this requires not just a
great deal of faith but a great deal of courage, and in our industry that’s in
short supply.
I was
Managing Director of Wiley Australia in the early 2000s when the dollar start
to climb, after five years or so of plumbing the depths, and the exhilaration
in the company, shared by all importing businesses, at our increasing margins
was palpable (and the executive bonuses bankable). But I soon realized it was
wrong. I fought my own divisional managers fiercely to force them to lower
prices regularly. We were the only company doing it. To me it was a matter of
integrity as much as anything else – keeping faith with our customers,
booksellers as well as readers.
I’ve long
argued that our booksellers’ obsession with Amazon and its GST-free imports was
misplaced. Of course we should welcome any move by the government to lower the
$1000 threshold, but we’re missing the real target. And that is massive over-pricing
by Australian importing publishers that has gone on for far too long. We
allowed Australian consumers to get hooked on Amazon and The Book Depository
and the whole industry is now paying the price.
Now let me
return to my main point, and as Ellen Degeneres said ‘And I Do Have One’. My
contention is that the industry globally, apart from corporate rationalization,
is adopting strategic postures in the face of the digital challenge that are
entirely misplaced.
I want to talk
about Google, then Amazon. And end with some optimism about the future.
You are all
familiar with the Google library scanning project. In 2004 Google began
scanning, without seeking permission from authors and publishers, entire books
that were held by half a dozen major university and public libraries in the US
and the UK. The purpose was not to sell the files subsequently but simply to
offer snippets (two or three lines) around key terms entered by searchers, and
then point them to where the book or file could be purchased or borrowed. About
12 millions titles were eventually scanned before authors and publishers
instituted legal action against Google. After a long period of negotiation a complex
Settlement Agreement was reached in 2009 and, according to proper legal
process, presented to the US Federal Appeals court for approval. It was
rejected by the judge, unfortunately, principally because it gave Google a
virtual monopoly, and thus the whole project was stopped in its tracks. Just
last month the publishers came to a different sort of settlement with Google concerning
works still on their lists – one that doesn’t require court approval - but the
authors, who are always very bolshie, are sticking to their litigation agenda.
Now here’s
the nub of the issue: Google always maintained that their scanning was ‘fair
use’ under the terms of the US Copyright Act. After all, they were undertaking
a scanning process that their library clients were already free to do under the
law for archival purposes; they were not intending to offer the files for sale;
and were not impinging on a publisher’s commercial terrain as there was no
conceivable market for ‘snippets’ anyway.
This always
sounded to me as innocent an activity as cataloguing, shelving or browsing. It
encourages discovery and eventual purchase by a consumer.
What is more,
the great majority of titles held in these major libraries were what is called
‘orphan works’ – titles in still in copyright but out of print where the
original publisher and/or author could not be tracked or contacted. They were
to be liberated: made discoverable and accessible to students, researches,
hobbyists, readers.
As a result
of the litigation, those works are still rotting in the deep recesses of the
world’s libraries, unknown and unloved.
Wouldn’t it
have been a wiser course for publishers and authors to welcome Google’s
scanning initiative and benefit from the sales of the discovered works that
eventuated?
Now for
another behemoth that’s universally loathed and feared by the industry, to such
an extent, it seems to me as to have become quite pathological. I refer to
Amazon.
Now I’m not
so naïve as to defend everything Amazon has done and is still doing. It’s a ruthless,
aggressive operation that rides roughshod over its competition and more
particularly over its suppliers.
But I do want
to lament the way the industry has dealt with Amazon since day one of the ebook
take-off five years ago when the Kindle was first released. You all know the
story. It’s become the trade’s standard, orthodox narrative:
Once upon a time Amazon invented an
ebook reader and in a short space of time garnered nearly 90% of the market for
the new, revolutionary ebooks. Amazon demanded 50% discount off the ebook price
of around $25.00 yet they priced the bestselling ebooks at $9.99, way below
cost.
The publishing community was aghast at
this outrageous and cynical manoeuvre. ‘This will lower price expectations
across the board’ they lamented. ‘It must be stopped’.
Fortunately a major new entrant
appeared, called Apple, with its amazing iPad. It said to publishers ‘Use our
app model – you set the price; we take 30% commission as your agent. However
you must not allow any other ebook retailer to undercut us on price.’
The publishers rushed on board (whether
after a boozy lunch at an upmarket Manhattan establishment is a debatable
point), and forced Amazon to adopt the agency model. This would end the
discounting, they yelped, and restore order and security to the book world.
Well of
course we know how the story then unfolded. The US Department of Justice
refused to believe the fairy tale and in April this year condemned Apple and
the agency publishers for their collusion to restrict competition. It
pronounced that the agency model had to be unwound.
The trade was
aghast, and the condemnation of the DOJ has been universal. As recently as last
week respected industry consultant Mike Shatzkin opined ‘the legal experts
applying their antitrust theories to the industry don’t understand what they’re
monkeying with or what the consequences will be of what they see as their
progressive thinking.’ Shatzkin demands
they respect the ‘specialness’ of the publishing ecosystem. By removing Amazon's ability to aggressively discount,
the competitive landscape is enhanced. It allows other retailers to emerge and
potentially flourish and not be crushed by a deep-pocket behemoth seeking
dominance at all costs by indulging in ‘predatory pricing’.
But I go back to my
Economics 101 basics: it is not the prerogative of a producer to so constrict -
for whatever reason - a retailer from engaging in the age old dynamics of
customer satisfaction. So no matter how large, voracious, aggressive, ugly, or
profoundly discourteous any particular retailer is at any time, a producer just
has to live with that retailer's consumer satisfaction strategy.
Let's remember that, pre-agency,
publishers were pricing their new ebooks at ludicrously high prices - often at
the same price as the hardback - and in fact far higher than Apple demanded
publishers price at if they wanted to deal with Apple. Ironically the consumer
demand profile of recent times is unequivocally demonstrating that the greater
volume of ebook sales occurs around the $10 mark, and falls off quite rapidly
at price points beyond that.
Now, post the DOJ decision,
the fear of many is that Amazon will return not just with renewed vigor but
with a good measure of vengeance. Some commentators are indulging in truly
awful effusions of doom and apocalypse, booksellers in particular, who for a
variety of reasons have no reason to love this online enemy.
But the Agency model, like
any price-fixing model, is a dead hand. My view is that if in the end if we all
trade in an open, unconstrained, free market then it is not naive to believe
that we will all be better off in the long run. New, original, highly
innovative business models will have a far higher chance of emerging if the
dead hands of tradition, authority, stability and comfort are not privileged. Protective
shells need to be broken to allow new life to emerge.
The industry went to war
with Google; it’s still at war with Amazon; it’s at war with the US Department
of Justice. Publishers are at war with authors over ebook royalties; they are
at war with libraries over ebook lending. Even consumers over DRM.
All these wars are
shameful. But what really amazes me is how we have sniffily turned our backs on
what has clearly been the greatest financial investment in books and reading
ever seen.
Billions of dollars have
been spent over the last decade alone in building a whole new digital ecosystem
to take our content to millions of existing and, particularly, new readers
around the world. Think of the enormous investment that Google has made into
reaching into the content of virtually every book published since Gutenberg and
making it discoverable and accessible to the entire world’s population. This
could only be of be of benefit to publishers.
Think of the hundreds of
millions of dollars Amazon, Apple, Kobo, Sony, Nook and others have made in
bringing eReading technology to the world’s consumers. It’s a massive reach-out
to the non-traditional, non-bookshop visiting consumer, particularly the young
who can now be distracted from HBO, Showcase and BitTorrent, and can access
content we publish on their must-have devices, including their smartphones.
Why haven’t we embraced, in
fact, celebrated this? Why have we been struck by a paralyzing timidity? An
awful defensiveness? A demobilizing moral panic? A reactionary urge to protect
our dated, legacy business models? A tentativeness that borders on the absurd. Why
haven’t we begun working positively with these behemoths to secure win-win
outcomes of real benefit to consumers, and equal benefit to publishers? Eliminating
DRM, closed systems, restrictive licensing arrangements, etc.
Here’s where small and
medium independent publishers can and should take the lead. You are a dynamic
and vibrant sector. You are the hope of the future.
You don’t have to worry
about savagely cutting costs. You don’t have any to begin with. You are not
captive to a corporate line, a groupthink. You don’t lack courage. You’ve
chosen to be in publishing after all. You don’t have to adopt the conservative,
timid, strategic postures of the corporates.
You can have a go. Take
risks. Experiment. And your opportunity to thrive will grow stronger as the big
publishers turn inwards and, under financial pressure, think only big. Ever
more gems will be considered by them small beer and a distraction from core
business. But these works are just as necessary to our cultural and social
development as they ever were.
Let me be personal for a
moment. I’m a literature graduate and an avid reader. I devour just about
everything Text publishes; everything Scribe publishes; everything Black Inc
publishes; even everything Louise publishes at MUP! At least half of my annual reading
diet comes from small and independent Australian publishers. And I would not be
unique. (And, by the way, I’m so delighted that Wayne Macauley’s The Cook won last night’s award. It is a
brilliant book on so many levels. Just like the food, the evil is exquisite! Simply
wonderful.)
I wish there was a way
fervent supporters like me could contribute financially to your continued
existence other than just buying your books. I wish Australian governments
could be convinced that there must be practical ways to support you and your
authors beyond the paltry grants from the Literature Board and the lottery of
literary awards.
But in the meantime can I
plead with you to continue to grasp the opportunities that will increasingly
come your way. Please.
Thank you very much.
