Why Online Retailers Will Squeeze Out Publishers In The Book Business

Matt Shatz

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.

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