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Why Online Retailers Will Squeeze Out Publishers In The Book Business

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Matt Shatz is currently Head of Strategic Content Relations for Nokia (NYSE: NOK). Previously, he was Vice President of Digital for Random House.

A decade ago, Napster made it clear that the music industry was going digital, forcing record labels to scramble to survive. Today, a similar phenomenon is playing out in the book world – and this time, it’s publishers that are on the defensive. As e-book sales rise, the big question is: do authors really need publishers anymore?

The role of publishers: Digital is undermining the role of the publisher because it eliminates the need for certain skills that only publishers have — such as managing a large web of paper and print vendors – and it lessens the value of their deep relationships with brick-and mortar-retail buyers. We are starting to see a few early but real signs of the erosion of the publishers’ position, from Random House’s recent announcement that they will sublet roughly 30 percent of their Manhattan headquarters, to author Seth Godin cutting a direct deal with Amazon (NSDQ: AMZN) to bring his new works to market.

The battle to be the primary intermediary between the authors and readers is a three-horse race. It’s among the publishers, the agents, and retailers like Amazon, Apple (NSDQ: AAPL) and Google (NSDQ: GOOG). Agents have the primacy of their talent relationships going for them, but they don’t have the infrastructure in place to create a global sales and marketing engine. In my mind, it’s the retailers that stand the best chance of being the new power broker as the book business increasingly turns digital. The main reason: The over 100 million billing and messaging relationships with consumers the leading platforms have today. More on that in a bit.

How publishers can win: Like record labels, large publishers such as Hachette Book Group and Penguin, aren’t going away. In fact, there’s actually a way they could win this horse race and retain their lock on authors – but I don’t think they can pull it off. What they’d need to do is quickly figure out how to recreate in the digital world the scale advantages they enjoy with traditional marketing, so authors would continue to believe that working with a publisher is the way to reach the widest audience and sell the most books.

To do that, they’d have to leverage their uniquely deep knowledge of books to master meta data that in the search-driven online world replaces the book cover as the critical discovery vehicle for books. So, for example, if a user searches for a book by mood, location, writing style or author awards, the publisher would provide information that optimizes a book’s reach. They’d have to figure out how to use social media outlets such as Groupon or Get Glue to transform book marketing, and find a way to develop the tight relationships with tastemakers of the digital world, as they have effectively done in the print market for years.

Publishers have been taking steps in this direction by shifting their ad spending to online, and having staff get up to speed on Facebook and Twitter as promotional outlets. But for the most part, this effort has been limited to a few relatively junior people working on a campaign-by-campaign basis and trying small-scale experiments.

In short, I don’t think publishers will figure all this out in time, which is why retailers will dominate the customer relationships in the future. They can amass enough of a consumer base that they can market a book to hundreds of millions of consumers and, more importantly, get enough of those consumers to buy the book. With those 100 million billing and messaging relationships, Apple and Amazon would only need to achieve a reasonable 1 percent conversion rate to help an author sell 1 million books, a level few authors today reach.

Retailers’ reach to consumers: The leading digital platforms have a number of assets that will help them win aside from just consumer reach. Their access to what people are actually reading will create a robust set of data that their army of analysts can use effectively. For example, a user who reads Jonathan Franzen’s new tome Freedom all the way through twice is a more likely a buyer for his next book than someone who received the book as a gift and never opened it. In the past nobody knew the difference between the two. In the future, leading retailers will. Similarly, someone who reads all of Walter Mossberg’s columns in their digital edition of the Wall Street Journal bought from Amazon is a likely buyer of a new Steve Jobs biography and a good target for a new mobile phone ad.

Leading retailers will also be able to invest more in robust billing and customer-care systems, two keys for building successful subscription businesses, and they can invest more in brand marketing and direct customer acquisition than publishers or agents. And when and if they want to get really aggressive, they can invest more in talent via advances or higher revenue shares in more than just a handful of isolated examples.

Willing to take more risk? Some authors would have to be willing to take on more financial risk, and not all can afford to, but already dwindling advances and marketing budgets lessen the potential pain. Recent investments in self-publishing platforms by Amazon and Barnes & Noble (NYSE: BKS), among others, have paved the way for a massive transformation once digital sales offer enough upside to writers, a time not too far away.

At the recent Web 2.0 summit in San Francisco, Ari Emanuel, head of the William Morris Endeavor talent agency (and the inspiration for the Ari Gold character in HBO’s Entourage series), fired a new salvo in the “do we need them?” war with publishers: “I definitely don’t think I have to go to Knopf. I don’t think I have to go to Simon & Schuster for the book business. So I think that’s going to be a very contentious conversation,” he said. “They might just get hardcover (rights), but I don’t know yet.” Only time will tell how this dynamic plays out, but the threat is more credible now than at any time in the past.

This article originally appeared in Nokia.

18 Responses to “Why Online Retailers Will Squeeze Out Publishers In The Book Business”

  1. Amazon, Apple and the other online retailers will win this battle because the revenue stream will just not allow analog publishers to hold on to dominance. Agents will survive but will lose value. Everyone better get used to it because we’ve seen this story play out before with music and film. In fact, in the future, Amazon et al will be even MORE important to the publishing industry because they will be arbiters of what sells. Their algorithms, recommendation engine and merchandizing usability interfaces have more to do with what books sell than anything a publisher is going to do. Game over; we should all get used to it.

  2. Jenny Frost

    I agree. Competition will benefit writers both in terms of options and competition for the best content e.g. pay. The convergence also includes forms of media. The lines between book publishers, magazine publishers and news outlets will continue to blur as formats evolve and include apps and different, as yet uninvented, slices of content.

  3. Jack W Perry

    Enjoyed your article. The traditional roles of publisher, agent and retailer are changing. The survivors will be the ones that adapt to the new world. It will be a mix of publishers, agents and retailers. The lines are already blurry and will only get more so.

    My opinion is it will be better for writers everywhere.

  4. I don’t know about anyone else, but as a bibliophile who purchases a lot of books, I am not interested in the eBook model until I actually OWN the content that I’m purchasing. The current model is licensed content which means I’m only renting it. I am not interested in spending $10 for rented content when I can purchase a paperback for $10, own it, and resell it when I’m done with it. If publishers expect me to rent content, then they need to get used to providing content for $1-$3, because I’m not willing to pay much more for it.

  5. Jennifer U hits the nail on the head in my opinion.

    One might say that what is happening here is that we are trading one “system” for another system. The existing system is a very large, well known, and stable marketplace with economies of scale and the ability to sell in numbers that are life sustaining. Marketing, national sales, global sales, and the money to support all of that IN ADVANCE of any books ever being sold are all part of this system.
    Getting through the bottleneck gains you access to all the support systems offered by the publisher.

    This new system, if you choose to enter it, is built on technology that allows any of us to be an author and “get published”. Yahoo. So what. The need for sales, marketing and support are STILL JUST AS CRITICAL in this new system, except now the author has to provide all of that instead of the publisher, both money and labor. No bottleneck. No support systems. Complete freedom to starve :)

    Go ahead and try this new system. Write your book (in any format) and publish it on your own. You will quickly learn the value of the old system, simply by seeing all of the services and struggles that you now need to provide in order to sell anything.

    To me, the old Disney quote (Iger??) about trading dollars for pennies fits quite well in this conversation.

  6. Jennifer U

    Publishers provide much more than just paper, printing, and binding. Any opinion that relies on a belief that all publishers really do is sell books shows a gross misunderstanding of the industry. First and foremost they provide an exceptional editing and filtering service so that you as a reader do not have to buy 25 romance novels to find one that is worth finishing. They also pay advances, which many authors need in order to be able to take time off for research, pay permission fees, etc. Publishers also serve as a massive marketing and publicity engine that allows for the emergence of bestsellers. If the world of books were to end up consisting solely of self-published ebooks, it would be much harder for readers to link up quickly and cost-effectively with truly good reads that are worth their time and money. Literature would become one huge slush pile with many hidden gems never seeing the light of day, and the resulting dearth of focus on books that are worth reading would ruin the literary conversation.

  7. Peter Turner

    Nice post, Matt. Seems like a good summary of the dynamics facing authors, publishers, retailers, and customers/readers. I would frame it a different way, that these distinctions are breaking down and it’s unclear who’s in the best position not to be dis-intermediated. I would say that the curatorial function that editors/publishers have traditionally provided is essential in order for there to be a sustainable business to content creation. That value in the supply chain isn’t diminished in the digital space but amplified, simply because there is so much user-created content with little of it being curated.

    My feeling is that niche-oriented publishers–who traditional have a very good sense of their readers and the subject matter that interests them–can thrive if they can create direct-to-customer/reader relationships in a cost-effective way and quickly.

  8. Publishers will always be needed.
    As the owner of a small publishing house in Maine, I see a changing but necessary role.
    When you ask your question, remember not everyone is as tech savy as yourself. Some of my clients use a PC on a daily basis, are on FB, Twitter, different blogs… but can’t get over the hurdle of making their manuscript presentable.
    Most clients need a basic understanding of how a book is put together. The successful publisher will build strong bonds with the authors, and help them promote books through an ever changing electonic format.

  9. Carolyn Pittis

    I would concur with most of Matt’s points, so clearly and aptly set forth.

    That said, authors need more help in this book marketplace than they’ve ever needed – it changes so rapidly now. Whom they choose to work with will likely continue to be based not just on who is paying what rates and who can get them in front of the largest number of potential readers, but on any third party’s level of trustworthiness, expertise, and on their shared focus on the author’s career as a full time writer, not just on the individual success of a book.

    The question thus becomes, in a hyper-driven consumer marketplace, where meta data will indeed be the midwife of all marketing and discovery and commerce, who is serving which needs of the content creators’ themselves? Who is helping them, literally and figuratively, learn how to be a better author and content creator – and yes, marketer? What are those jobs called? What business model is applied to them? And who is paying those salaries?

    In the old days of the 20th century, we called this – too – “publishing.” The need for this doesn’t go away – and new technologies afford many more options of how to do this faster, better, and at greater scale than ever. We will continue to see a flourishing of this “publishing” now, as the need for it only grows in a noisy and crowded consumer marketplace. Who the “brand” winners are in this marketplace will be interesting to see.

  10. As an author, I always described publishing with the following terms: ‘Slow’. ‘Technophobic’. For example, the only publisher I’ve worked with that used Track Changes to edit a manuscript was F&W. Every publisher I’ve worked with in NYC still uses the printed manuscript, with rubber band, post-its, and pencil marks. This does not bode well for the ability to adapt to the rapid changes.
    In January 2010, at Digital Book World, agents and publishers, overall, were dismissive of eBooks. “Why be concerned about something that’s only 3% of our revenue?” was the refrain.
    That tune started to change. At the end of 2010, publishers were willing to admit that eBooks now constituted 10% of their sales and, frankly, I think they’re “juking the stats” to quote The Wire. Every author I know, based on their June 2010 royalty statements, says eBooks accounted for 40-60% of their sales. My statements reflected the same.
    It’s simple. Publishers controlled distribution. They no longer do. I’ve already experienced agents trying to get a foot in both camps: sell to traditional publishers but also start publishing their clients’ backlist on their own. I don’t think that straddle philosophy will work.
    My agent will be marketing my latest book, historical fiction, in a few weeks. Besides the traditional manuscript, I am building an enhanced e-version of the first 50 pages to show the possibilities that eBooks hold. Since the book is about the Civil War, the first war with photography, I have a wealth of resources. Last night I even embedded a traditional song well known among West Pointers in the appropriate place in the book. It will be interesting to see if any publisher sees the possibilities.
    I think it’s an exciting time for those who are acting, instead of reacting. Sadly, most traditional publishers are reacting. At Write It Forward, we have been discussing the future of agents, publishers and authors. What I find fascinating, is how rarely anyone from publishing is really willing to listen to authors on this topic. Check out the panels at all the conferences on digital publishing and you see many ‘experts’ but rarely authors. My motto from my Infantry days is “Lead, follow, or get the hell out of the way.” Right now, authors are leading. They produce the content. Readers consume the content. Everyone else is in between. Either help, or get out of the way.

  11. This has been an ongoing argument on whether or not publishers will be a thing of the past. As we know, some newspapers have died out (are dying out) or have transformed (are transforming) their entity to the web. Newspapers made a mistake for not charging for some of their content online when the web first started. Bloggers and other sites got smart and started to charge for premium content, services, and other products. So, publishers should do the same, transform their entity to the web, and develop new revenue streams. I see online book shows, virtual tours of an author’s house like Stephen King’s house, group social reads, and book games (apps) or physical/3-D amusements (temporary) as ways to make money hardcore readers.

    However, protecting intellectual property is the main problem because technology is so fabulous and dangerous because it makes it easy to make anything and reproduce it cheaply. Content is easy to steal and there is a lot of theft going on. Perhaps cloud computing will help, but will there be thefts, the hacking of accounts of well known authors and editors and suddenly that book is turned into a pdf and sold under a fake name or integrated into a new book by changing a few characters and scenes ? The Wikileaks situation illustrates that anything or anyone can be hacked for the good or for the bad.

  12. Jenny Frost

    Matt makes some interesting arguments about the future for agents, publishers and retailers. Certainly there is an onus on publishers to legitimize their ongoing role in the publishing chain. However, as long as there is a significant hard copy marketplace for books, publishers have some security in their role. It is, however, imperative that publishers retain both digital and hardcopy rights. The moment they allow them to be split by authors or agents, they are dead. Some publishers will have the business structure that allows them to go direct at least for a significant portion of their sales. These will not be trade publishers, but business and professional publishers with the ability and marketplace to develop this direct to consumer model. My biggest quibble with Matt’s assertion that retailers hold an edge for the future is that retailers do not have content skills at this point and that authors don’t have the skills or interests to maintain direct relationships with multiple retailers. Most authors (Seth Godin excepted) can’t handle the metadata and business relaitonships with the necessary multiple retailers to reach scale. This could be an opportunity for agents, but I agree with Matt that they don’t have the marketing and infrastructure to take on this role. This leaves space at the table for publishers in the future. But I heartily concur with Matt that in order to get a full meal, publishers have a steep learning curve and I think most cannot make it up the hill.

  13. As a publisher creating original content, we at Simply Magazine find it difficult to reach the appropriate people at publishers and agents to buy or license content. They tend to be restrictive in approach, protective of their turf, and unwilling to make low retail price/low cost deals. We have had great success with authors who have liberated themselves from the “gatekeepers” as this author states. We focus on audiobooks which most publishers don’t, but their agreements with authors prohibit the authors from dealing with us–but their books never make it to audio books. HBR has been a notable exception. So what is the author to do: retain rights the publisher and agent does not “help” you on. eBooks have a tremendous advantage for B level authors (that’s us!) because a wider diversity of books can be carried by publishers. With Borders disappearing, and Barnes & Noble physical book stores not far behind (as they emphasize their Nook and Coffee shops), the major mass merchants limit their assortment to a few hundred of top sellers or inexpensive books, a B level author is not apt to see any published work going into many outlets or remaining in circulation very long. eBooks will have a long life. Amazon has done a first class job on that. Good article.