The publishers dilemma

Posted on: April 24, 2009

As the industry is moving  towards it’s digital future, it becomes more and more evident to me that publishers are in a dilemma.  Recent growth figures of  ebook sales and continuous press coverage on the topic are responsible for the industry’s effort to manage a transition rather than change. A fatal mistake.

In previous posts I repeatedly argued that in the long run book publishers might not be able to defend their place in the value chain. The effects of digitalization (mainly new distribution powers for content creators and eroding prices for digital content) were too harsh and impossible to offset with ordinary restructuring efforts. A new perspective and more importantly, new capabilities were needed to defend the publishers role, I argued.

The dilemma  publishers are in today is that selling ebooks (the way they currently do) might actually be good for them, at least in the short run. The reason for this is that retailers and technology firms are currently battling over the dominance in this new market. In order to win customers, amazon and Sony need content to fill their devices and retail platforms. To do so, they are willing to pay publishers a parity price for ebooks, even though they sell them for less.

This currently favorable situation will lead to the the following. Publishers will manage their digital business the same way they used to manage their physical business. I call this transition management. Nothing really changes here besides the product being a digital file versus a physical book. The whole value chain and the publishers business model is assumed to remain the same.

But digitalization is not about a product moving from its analogue to a digital form. It is a revolution that changes everything. The old business models don’t work the way they used to. Inevitably, publishing needs to think about how it can still inject value somewhere in between the creation of content and its distribution. Not transition but change management is needed.  Acknowledging this is the first step in getting out of the publishers dilemma.

The following model represents my current state of mind on how the much talked about change could look like.

Let’s start again with the commonly known value chain in publishing:

  • authors –> agents –> publishers –> whole-sellers –> retailers –> consumers

In order to be consistent with my previous argument, digitalization empowers the creator and consumer of content, and potentially allows disintermediation. In the end of the day, consumers spend the money that needs to feed all activities along the chain. If the price for the digital good is lower than its physical counterpart ($26 hardcover book vs. $9.99 ebook) it means that all value chain participants earn a lower margin.  In order to maintain margins for all players, the digital content would have to be produced and distributed cheaper (by the amount of the price differential). At least for publishers this is a daunting task and almost impossible as most costs don’t go away (editing, marketing, etc.) in the digital world. The logical consequence is the following:

  • authors –> agents –> publishers –> whole-sellers –> retailers –> consumers

Publishing needs to solve this conundrum for the sake of their survival. I believe there are two ways for to act assuming the other chain participants are not engaging in any reshuffling themselves. The options are not mutually exclusive. Going one path does not mean you cannot go the other one, but I recognize that going in both directions might be a stretch at this point.

Option 1: Backward integration

You can call this option IP Development. Publishers currently don’t fully own the rights of their authors. In some cases not even the right to publish an electronic version of a book. This is a problem, especially if authors learn to distribute their work themselves through digital channels. Other than placing huge bets (rights acquisition and upfront payments to authors) publishers should reach out to authors and have them develop stories (content) that publishers fully own and distribute in the channel of choice.

The competency of the publisher now becomes story development. Similar to film studios and gaming developers, the successful story creation is the product of a process that carries the DNA of the publishers creative capabilities and cannot be easily replicated. A story team would consist of creative people (authors), cross media specialists, technical staff and general managers who overview the process. During the creation phase the team already takes into account the possibility to add, short film, video game, audio or even TV elements to the original format.

The Knight Digital Media Center from the Berkeley Graduate School of Journalism has a great article on multimedia storytelling on their website.  The market for a story becomes significantly bigger and due to the enhanced capabilities of a publisher, authors might be more inclined to stick.  The benefit for  publishers is twofold. Being a true specialist in developing IP for multi channel distribution allows them to fully explore the possibilities of the digital age and at the same time offering the place to be for creative talent. Other than the simple activity of connecting the value chain, the new content creation processes cannot easily be disintermediated.


Option 2: Forward integration

Other than in Option 1, publishers could reach out to the consumer themselves in a direct to consumer effort. Publishers currently give away approximately 50% of the margin to retailers. This is a lot. Considering that the retail price for ebooks steers towards a much lower price point ($9.99) it is hard to imagine how a mutually beneficial relationship between retail and publishing might unfold.

In a digital market, a purchase becomes essentially a download triggered by the click of a button. Great logistics, retail space, service and all the key success factors for traditional retail become less a value driver when it comes to digital downloads. The shopping experience to the consumer nowadays is more driven by context and relevance than availability and assortment. It is about the community, recommendations, exploration of the new and cross media relevance (ability to cross sell parts of a story through different channels, as described in option 1). None of that is currently a strength of traditional book retailers.

No matter how the dominant business model for content business might look like in the future, it appears to me that the Dollars are where the customer is. Being close to the customer isn’t something content creators should give out of hand. Whether we talk about subscription models, advertising based or ‘free’ financed through ancillary businesses, the value of a relationship with the paying customers will outweigh anything else.

Whether you agree or disagree, I think it is important to look beyond the current hype of exploding ebook sales and look into the real impact on the publishing business. I would much rather see us all in managing change than transition.

Happy weekend,



3 Responses to "The publishers dilemma"

[…] The Publishers’ Dilemma — Tobias Schirmer on publishing’s digital future: [D]igitalization is not about a product moving from its analogue to a digital form. It is a revolution that changes everything. The old business models don’t work the way they used to. Inevitably, publishing needs to think about how it can still inject value somewhere in between the creation of content and its distribution. Not transition but change management is needed.  Acknowledging this is the first step in getting out of the publishers dilemma. […]

I agree completely with your assessment of the publishing value chain and the vulnerability of the big publishing houses. It’s a significant problem. You have the Hollywood model wrong, though. Studios don’t create stories. I think publishers are pretty screwed in the long run, but a new segment of Book Producers (like Hollywood) will become powerful. You can read this to see more about this theory:

Thank you for your comment and insights on your post on Hollywood production processes. What you suggest for your friend who lost his job is basically a forward integration model for literary agents. I think you made a great point and when I wrote about possible options for publishers I assumed no changes among other value chain participants, which is of course a naive assumption. Agents will attempt to broaden their capabilities and I think this could well be an interesting option for your friend.

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