Saturday, November 10, 2012

Keynote Address, Small Publishers Network Conference, Melbourne, Nov 9, 2012

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.


Peter Donoughue said...

In an address at CAL's AGM, chair Sandy Grant warned members of the threat of international ‘publishing juggernauts’ to Australian writing.
‘Without a doubt, we are in a dogfight. Make no mistake, publishing juggernauts like Google, Amazon, Facebook and Apple (GAFA) are demolishing the Australian writing and publishing industry,’ he said. ‘Initially seen as white knights, GAFA are turning content into a commodity designed to drive sales of advertising or hardware. They make no investment in the development of new talent and the sharing of Australian stories.’
‘We need the next generation to be convinced that this is work to be respected and rewarded. Copyright Agency accepts it has a serious responsibility to fully participate in what is a massive international battle to convince digital natives that paying for content is right.’

Anonymous said...

It is hard to counter this kind of thinking. It is blinkered and self-serving, almost Edwardian, in its sense of entitlement. The publishing process,of which Sandy is a tremendously successful exponent, inevitably turns content into a commodity. That's what it is all about. So how exactly are GAFA demolishing Australian writing?

And as for the "white knight" metaphor, are we now supposed to see GAFA as THE BLACK KNIGHTS in the "massive international battle"? This is commerce, not a battle of good versus evil. If there is a valid military metaphor, it is that GAFA are the new weapons we are confronting. The cavalary charge of the last century is over. All cavalary officers should leave the field.

With their incredible market acceptance and mass utility (imagine life without Google), GAFA will naturally use whatever legal means they can to grow their share of consumer spending. Publishers complaining that it isn't fair is not only futile, it's demeaning.

Greg Browne