A trade publishing industry staggered by the paradigm shift from tangible to virtual suffered a major body blow today as America’s second largest bookstore chain sought protection under Federal bankruptcy laws.

According to Publishers Weekly, on the strength of a $505 million pledge by a corporate refinancer the chain elected reorganization (Chapter 11) rather than liquidation (Chapter 7), hoping to shed highly devalued real estate holdings and other liabilities including underperforming stores among the 674 currently on its roster. But Chapter 11 isn’t a slam dunk: As Publishers Weekly explained, “It is believed an agreement by publishers to resume shipping books to Borders will be necessary to obtain debtor-in possession financing that will allow it to reorganize under Chapter 11.”  Hopefully Borders achieved this goal.

But the $230 million it owes publishers for the stock of books it recently acquired, and the fate of the books themselves, will not be sorted out at a pace that will do publishers or authors any good. Federal bankruptcy laws favor secured creditors like bank lenders, while unsecured publishers have little leverage even though books are what bookstores are all about. Authors of course are at the end of the line. After all, all they did was write the books.

Despite job cuts, store closings and budget slashes the chain has been sliding to oblivion for years and has been the subject of bankruptcy speculation. Even during the 2010 Christmas holiday, it suffered a 15% drop in sales over the prior year’s revenues. The gathering storm clouds of bankruptcy only added to Borders’ woes as publishers withheld vitally needed shipments of new releases. Unlike its principal rival Barnes & Noble, which has the Nook to help B&N’s transition to an e-book business model, Borders’ alliance with Kobo was too little too late to bootstrap itself out of woe.

The handful of major publishers that have survived the upheavals of the last decade probably have adequate resources to get through this latest one too, but marginal presses that have barely hung on may be sucked under for good. Big or small, no one will escape unharmed. Publishers Lunch‘s Michael Cader lists the publisher creditors in a veritable bloodbath of debt:

Penguin $41.1 million
Hachette Book Group $36.9 million
Simon & Schuster $33.75 million
Random House $33.5 million
HarperCollins $25.8 million
Macmillan $11.4 million
Wiley $11.2 million
Perseus $7.8 million
F+W Media $4.6 million
Houghton Mifflin Harcourt $4.4 million
Workman $4 million
McGraw-Hill $3.1 million
Pearson Education $2.8 million
NBN $2 million
Norton $2 million
Zondervan $1.9 million
Hay House $1.7 million
Elsevier Science $1.6 million
Publications Intl. $1.1 million

It’s going to be bad.

Richard Curtis

Taking an electronic leaf from rival Barnes & Noble’s playbook, Amazon has announced a lending feature for its customers.

‘The Kindle Book Lending feature allows users to lend digital books they have purchased through the Kindle Store to their friends and family,” says a recent Amazon.con release. “Each book may be lent once for a duration of 14 days and will not be readable by the lender during the loan period.”  As loans are not sales, authors will receive no additional royalties, but it is hoped that loaned e-books will attract new reading audiences.

For would be lenders and borrowers, details may be read here.

Richard Curtis

From time to time we bring back some of the more popular articles and blogs posted on E-Reads.  This one is from November 2009.

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“All is vanity.”
Ecclesiastes

The uproar over Harlequin Enterprises’ launch of a self-publishing venture reminded me of something my father used to say. He was an honest businessman, but every once in a while, when he saw an unscrupulous competitor getting stinking rich, he would shake his head and say, “I’m in the wrong racket.”

I sometimes wonder if I’m in the wrong racket too. Maybe I should have gone into vanity publishing. I’m sure I’d have made a fortune. Everyone who’s gone into it has made one, so I can’t blame anyone for succumbing to its allure.

And now mainstream publishing has jumped on the bandwagon, with respectable firms like religious publisher Thomas Nelson and, most recently, Harlequin Enterprises picking up the banner. The line that once sharply separated traditional publishing (“We pay you”) and vanity publishing (“You pay us”) has all but dissolved in this corrosive environment of fabulous riches.

My early exposure to the power of vanity occurred when I joined Scott Meredith’s literary agency after graduating college. Meredith had a fee-reading operation that ran like a turbine engine. Using his agency’s track record as bait – his brochure was a collage of six- and seven-digit checks paid to professional clients – Meredith attracted countless would-be authors prepared to shell out hundreds of dollars for a manuscript reading they hoped might lead to acceptance for representation and an eventual professional career. I don’t believe I ever saw a book accepted for representation out of the fee-reading program in all the years I worked there. Meredith’s operation made tons of money and he died a wealthy man.

Around 2000 a number of enterprising business people recognized the profit potential in self-published books utilizing digital media. (For purposes of this piece I draw no distinction between self-publication, subsidized publication and vanity publication.) Until then the most famous name in subsidy publishing was Vantage Press (which, significantly, is still going strong). But companies like iUniverse, Xlibris and an outfit called Fatbrain offered a variety of self-publication services. How well did they do?

Well, Fatbrain with its subsidiary Mighty-Words, which published technical and professional material online (someone described it as Amazon for geeks), was sold to Barnes & Noble for $64 million. Xlibris? Acquired by Random House for an undisclosed sum, then sold to Author Solutions, the vast self-publishing empire which embraces iUniverse, Author House, Wordclay, Inkubook and Canadian vanity publisher Trafford Press. Kevin Weiss, CEO of Author Solutions, projects $100 million in revenue in 2009. Last year, Author Solutions released more than 21,000 new titles, according to Mediabistro, “including one out of every 20 new titles put into distribution in the U.S. Overall, ASI’s catalog now includes more than 120,000 titles from more than 85,000 authors.” Author Solutions is partnering with Harlequin in its soon-to-be-renamed Horizons self-publication program.

But there’s more. Publishers Marketplace publisher Michael Cader recently reported that “Ebook distributor and online self-publishing platform Smashwords announced late Friday that BarnesandNoble.com will sell titles from the company as part of its new ‘premium feed.’ Smashwords, which says they publish about 2,600 titles electronically, will sell to BN.com at a traditional discount… Founder Mark Coker says that ‘additional distribution relationships are forthcoming.’ He says that ‘until today, it was difficult if not impossible for independent authors and publishers to gain such mainstream digital distibution.’”

Yet another company, Scribd, calls itself “the largest social publishing company in the world, the website where tens of millions of people each month publish and discover original writings and documents.” Scribd boasts “10 million documents published” and “5 million Scribd document reader embeds.” Last spring it was reported that Scribd was partnering “with a number of major publishers, including Random House, Simon & Schuster, Workman Publishing Co., Berrett-Koehler, Thomas Nelson, and Manning Publications, to legally offer some of their content to Scribd’s community free of charge. Publishers have begun to add an array of content to Scribd’s library, including full-length novels as well as briefer teaser excerpts.”

With so much money being thrown at subsidy publishers, and with the blessing of mainstream publishing, the evolution of vanity from the margins to the center of the publishing universe is complete. The erosion of traditional gatekeepers like reviewers, critics, newspaper book editors, and other refined literary tastemakers makes it clear why even a conservative publisher might lose its head over the prospect of all that money – and be tempted to go into another racket.

Richard Curtis

Earlier this year, when the Borders bookstore chain seemed to have entered the death-rattle stage of its troubled life, we posted an article suggesting that the perfect rescuer would be a book publisher.

Today, as Barnes & Noble faces the prospect of being put up for sale, it seems appropriate to propose the same solution.

We’ve reproduced pertinent passages of the Borders article below, with Barnes & Noble bracketed to make our point.  We think it would be smart business for Borders, we think it would be smart business for Barnes & Noble, and we think it would be smart business for a publisher. Or is “smart publisher” an oxymoron?

Richard Curtis

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When Galley Cat invited me to make some predictions for the coming decade, I conjectured that sometime in the near future we would see the merger of a major retailer and a major publisher. Here was my reasoning: “A combined publisher/retailer solves many problems for both.The retailer owns the content and doesn’t have to pay a premium for it. The publisher does not have to pay a premium to distribute its books. There would be huge efficiencies of manufacturing and distribution.”

I’ve had about a month to think about what I said, and I want to revise it. The efficiencies of a retailer/publisher combine would not merely be huge. They would be decisive. If you don’t believe it, ask Amazon.

Amazon started as a retailer but has become a publisher too. It started with its Encore program aimed at identifying overlooked books and authors. That was followed by the creation of a service called CreateSpace aimed at self-published authors. And now Amazon has begun publishing mainstream authors.

Though Amazon has no qualms about becoming a  publisher, publishers are terrified of becoming retailers for fear of provoking the wrath of their key accounts – B&N and Amazon. When publishers do dip a timid toe in the water and try to sell their books direct to the consumer, they offer them at full list price, which cannot possibly compete with the deeply discounted prices charged by B&N and Amazon. Yet, if they wanted to, publishers could sell their books directly to the public at 40% discount or higher and thus level the playing field.

The solution? To survive, to remain competitive, publishers may have no choice: they must either become retailers or end up being acquired by them.

At this moment Borders [Barnes & Noble], one of the best and most popular bookstore chains in the business, is in a life and death struggle to remain viable. If a publisher were smart it would rescue Borders [Barnes & Noble] and go into the retail business.

Retailers, I said a while ago (see Direct Sales: Publishing’s Last Stand), are intermediaries in a world that is rapidly disintermediating. As big as they are, retailers are vulnerable to market forces bent on eliminating middlemen, and that’s precisely why they have begun publishing books. The digital revolution demands a direct relationship between content provider and consumer. Merging a publisher and a bookstore chain like Borders [Barnes & Noble] would bring both struggling enterprises a little closer to that direct relationship, to profitability and to competitiveness.

Do I hear any bids?

Richard Curtis

When Barnes & Noble acquired Fictionwise  (See Barnes & Noble Levels the E-Book Playing Field), at that time the world’s leading e-book store and still the leader in multiformat, we knew it was only a matter of time before the parent company instituted some changes.

Today we learned that a big shoe has dropped: Fictionwise will be closing its so-called branded stores.  These are store-fronts hosted by Fictionwise enabling customers to view only the publishers’ own titles rather than the comprehensive list of all books retailed by Fictionwise.

The dedicated publisher pages will be terminated at the end of September, and publishers have been invited to redirect customer visits and purchases to the main Fictionwise website www.fictionwise.com.

The company, founded at the dawn of the e-book era by pioneers Steve and Scott Pendergrast, e-tails e-books published by some 500 publishers. The list may be viewed here. Each publisher has its own dedicated page which includes listings of the publisher’s current bestsellers and titles rated highest by fans. E-Reads is among them, and we too will be repointing our website to adapt to the new circumstances. We do not expect the change to negatively impact our business or Fictionwise’s but we’re sorry to see it happen. Fictionwise was founded around the same time as E-Reads and we consider them our close companions on our journey to the digital future.

Branded store closings notwithstanding, Fictionwise will continue to function as one of the world’s most successful e-book retailers and, as far as we’re concerned, one that is unsurpassed both in customer- and author-friendliness.

Richard Curtis

Circle September 28th in red on your calendar. That may be the last day of Barnes & Noble as we know it.

September 28th is the day of the company’s shareholders meeting. The fate of the world’s largest bookstore chain will be decided when its founder Leonard Riggio and the second biggest shareholder, billionaire Ronald Burkle, duke it out for control of the firm. You would not believe the contriving, conniving, jockeying and maneuvering going on as these sumos confront each other with hate in their eyes.

Hard as it may be to believe, because of sagging financial performance against its relentless rival Amazon, Riggio stands to be ousted from his own company’s managing board. If he is, what will happen to the company and some 1357 trade and college bookstores? No one knows, because Burkle’s intentions are unclear.  He has been articulate about what he doesn’t want – Riggio and his policies – but far from clear about what he will do with B&N if he gets his mitts on it.  (See What Does This Investor See in B&N That We Don’t See?). Burkle has not evinced much love for books, but he loves money passionately and he obviously sees plenty of value in B&N. Or is it the land that B&N’s stores sit on.

For a in-depth analysis of both men and the empire they are fighting over, read Andrew Rice’s splendid New York magazine profile The Billionaire and the Book Lover.

Richard Curtis

Every Blogger owes a debt of gratitude to newspapers and magazines. This posting relies on original research and reporting performed by New York magazine.

Is there somebody out there who can help us figure this guy Ronald Burkle out?

Here’s what’s got us flummoxed: The world’s biggest bookstore chain announces it’s putting itself up for sale.  The press declares the triumph of digital bookselling and even speculates that Amazon will acquire its tottering rival. This observer, who takes pride (perhaps too much) in his appreciation of the evolving nature of the publishing industry, writes an obituary for Barnes & Noble. The company is swirling around the crapper on its way to the Great Brick and Mortar Septic Tank, right?

So go figure why, instead of bailing, the guy who owns the biggest chunk of stock in this horse and buggy chain has stepped up his campaign to take over the company, even threatening to take it to the stockholders in a proxy fight? What does he know that dumb investors like us do not?

There can be only two explanations.  The first is that he is a financial genius who will leverage the struggling company in some super-sophisticated Enron-ish play that will make him billions but leave investors bankrupt, gut the firm’s assets, shutter some 1400 retail and college bookstores and write the epitaph for the once-great civilization that was printed books.

The other is that he is a cockeyed optimist who passionately believes in the future of paper and has a scheme for reviving the faltering retailer with a dose of digital technology and marketing knowhow. Maybe he’s thinking of installing kiosks in those 1400 stores that would enable shoppers to select among a million titles and download their choice into their Nook or print it on an Espresso machine while they wait? Then he can take all that leftover real estate and convert it into condominiums. We wrote about kiosks a while back (See Today DVDs, Tomorrow Books?) and have been wondering when someone would see a way to make them work.

Read Michael J. de la Merced’s New York Times article about Burkle’s bid for B&N and tell us if you have any bright ideas about what he’s up to: Billionaire Investor Nominates 3 Directors in Fight Over Barnes & Noble

Richard Curtis

This is speculation but in a survey conducted by The Street.com more than 37% agreed that Amazon represents the most logical choice” to take over the sinking Barnes & Noble book chain.

“Amazon has been a thorn in Barnes & Noble’s proverbial side since its inception in 1995, when it was solely a purveyor of books,” writes Jeanine Poggi. “B&N has consistently lost market share to its non-bricks-and-mortar rival, which has bested it on lower prices for hardcovers.

“Now the battle has gone purely digital. While Amazon took the lead, launching its Kindle e-reader back in 2007, Barnes & Noble is playing catch up, rolling out an e-bookstore last summer and introducing its Nook e-reader in October 2009.”

We weren’t among the polled but for whatever it’s worth we think it’s an intriguing idea. With all due respect to its recently acquired e-tailer Fictionwise, Barnes & Noble desperately needs a digital component, and Amazon would love to have a brick and mortar presence. What would happen to the Nook?  Well, what happened to the Auk?

For background read Barnes & Noble Succumbs to Digital Disintermediation.

RC

The announcement that Barnes & Noble has been put up for sale confirms something we have been saying for years: that on-demand bookselling is destined to replace the traditional brick and mortar model.To put the B&N news in perspective we thought it might be timely to reprint a two-part article we posted last spring dealing with the disintermediation of the old system and its replacement by one based on an on-demand, direct-to-consumer approach. This is part 2.

RC

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In our previous posting we pointed out that today’s “speculative” publishing model, based on the returnability of unsold books, is no longer viable. It has served us well for the better part of a century. But the digital revolution has created a highly successful, efficient new model relying on pre-ordered and prepaid books printed on demand.

The publishing industry has had decades to deal with its addiction to returns. I have been beating this drum in vain for decades including an editorial in Publishers Weekly in 1992 (see Behind Publishing’s Wednesday of the Long Knives). Now it is too late. The old way can no longer be sustained. The good news, however, is that it no longer has to be. Amazon has demonstrated that the prepaid model is mature and ready to replace the old speculative one.

Publishing oracle Mike Shatzkin would seem to support this vision of things to come. In a recent article he projected “about half of new book sales will be made through online purchases if we count the print book sales made through online retailers (mostly Amazon). Online print sales can be served through inventory generated on demand. So, if these estimates are right, we are less than three years away from a publisher (or author) being able to reach half the market for a book without inventory risk!”

“Every publisher,” he adds, “should be preparing for the disruptive effects” of this paradigm shift. Among his recommendations are:

• Publishers are going to really have to rethink the development process for their ebooks.
• It will be eminently sensible to launch books with a no-inventory strategy and move to press runs with returns allowable when reviews or sales have proven that it makes sense…The idea of printing and distributing speculatively will make less and less sense as the potential market to be reached by that tactic diminishes as a share of the whole.
• By the end of 2012, we’re saying half of all the sales potential can also be reached with the product without a local nexus: no requirement of local inventory or any shipping or revenue collection facility beyond your digital distribution and print-on-demand partner.
• Because books or ebooks will be purchased by half of their customers electronically, the potential exists to know exactly who those are and to establish interaction with them…This opportunity presents a new battleground for competitive advantage that publishers will have to pursue both for marketing and for author relations.
• Publishers will have to start devoting the bandwidth and resources to direct sales that they devote to intermediary sales today. (See Direct Sales: Publishing’s Last Stand.)
• There’s an inevitable concurrent downward spiral of brick-and-mortar retail inherent in this forecast that sales are moving online. The nearly-limitless online selection has been an increasingly powerful magnet since the day Amazon opened and in the new paradigm there will be a growing body of talked-about content not visible on store shelves.

“On-demand printing is very much in demand in 2009,” says David Taylor, president of Lightning Source, the biggest POD supplier in the business. “The business model, quality and cost structure have matured considerably in recent years. With POD, publishers can better match supply to demand, thus eliminating the risks and costs associated with the book market….A globally distributed print model, where publishers use the same file to print at multiple locations that are closest to the origins of the orders, has given the book industry a platform to publish smarter. POD is no longer an optional novelty; it is an integral and essential part of the future of publishing.”

Richard Curtis

The announcement that Barnes & Noble has been put up for sale confirms something we have been saying for years: that on-demand bookselling is destined to replace the traditional brick and mortar model.To put the B&N news in perspective we thought it might be timely to reprint a two-part article we posted last spring dealing with the disintermediation of the old system and its replacement by one based on an on-demand, direct-to-consumer approach.

This is Part 1.

RC

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By now it must be clear to all but a handful of diehards that the business model based on returnability of books for credit, a practice instituted by the trade book industry some 75 years ago, is no longer viable. In fact it has proven to be a bargain with the Devil.

The original principle on which it was instituted – to encourage bookshops to invest in otherwise risky literary forms like first novels and poetry – was an admirable one, and publishers can look back with pride that their good will made possible the launch of countless great works and authors. But soaring returns have rendered this practice utterly dysfunctional. Return rates approaching or even exceeding 50% have slashed profit margins of trade book publishers to single digits, no digits or negative digits.

Though the industry managed to keep a lid on returns until the latter part of the 20th century, in the post-World War II era the system deteriorated as return rates escalated, triggering cash shortages. The consequences were catastrophic: countless underfinanced houses were driven into the arms of larger ones. These big fish in turn succumbed to even bigger fish until we ended up where we are today – with a handful of bloated leviathans. But even they have discovered that immense scale offers no immunity from the same toxic business model that forced smaller houses to give up the ghost. Huge publishers may have more blood to hemorrhage than small ones but eventually they succumb too.

Yet, despite decades of proof that returnability is a sucker’s game, the publishing industry is incapable of curing its addiction to the practice.

The time has come for publishers to accept the fact, now glaringly apparent to all but those in total denial, that no business enterprise can afford to sell just half or even two-thirds of what it manufactures – and to foot the bill for the return and disposal of the unsold other half.

Some pundits ascribe the woes of our business to printed books themselves, saying that the medium is no longer appropriate for our times. In truth nothing is wrong with printed books. Everything is wrong with the way they are distributed.

And the way they are distributed is appallingly profligate, taking a dreadful toll on the environment in terms of paper waste and carbon footprints. The tortuous methods by which bookstores account to publishers and publishers to authors are imbecilic and arguably fraudulent. An alien visitor tracking the journey of a printed book today from editorial office to printer to warehouse to bookstore, back to warehouse and then to remainder jobbers or pulpers would have genuine reason to wonder whether there is intelligent life on this planet.

For over a decade we have had before us a technique for publishing books called print on demand. Those who witnessed its introduction at a book expo in 1998 declared the process revolutionary. Though it’s taken a decade or so to refine the technology, they were absolutely correct. The delivery system has matured and begun to make serious inroads on the traditional one. Though representing only 2.5% of all book production in 2009, it is expected to grow at 16% per annum according to David Taylor, president of Lightning Source, the nation’s biggest POD firm. The first generation of Espresso POD machines, now being installed in libraries and bookstores, promises to expand the technology’s popularity even further. As anyone who has seen a demonstration of the Espresso can testify, the process itself is a technological miracle and will most certainly be miniaturized. It is easy to imagine a day when POD kiosks – in bookstore or non-bookstore venues – will issue books from an infinite inventory of digitally stored titles.

But it is not just the technology that is so exciting to contemplate. It’s the business principle underlying the process that promises the invigoration and perhaps even the salvation of printed books.

The Speculative Model

In today’s traditional model, which might be termed “speculative,” publishers relying on information gathered from booksellers make educated guesses about how many copies to print and distribute. The sale of a book occurs only after it has been published, placing the burden of financing its publication squarely on the shoulders of the publisher. To the degree that the publisher’s forecasts are incorrect, unsold copies will be returned. Settlement of retailer accounts are delayed or adjusted while returns are processed, delaying desperately needed cash flow to publishers. Publishers in turn must delay settlement of royalties to authors for months and even years until returns calculations are finalized.

In short, the entire system is founded on a negative principle: it’s not how many copies of a book are sold, but rather how many are not returned. Everybody in the chain suffers, from bookseller to publisher to author. Even readers suffer because the cost of all this inefficiency is passed along to them in the form of higher book prices.

The Prepaid Model

Now consider the business model created by print on demand, which we’ll call “Prepaid”. When a book is ready for sale it is displayed on the website of a publisher, author, retailer, or all three. Customers may browse or sample it online. When they decide to buy it they purchase it on the website, charging it to their credit card. Until that moment the physical book does not exist: it is simply a digital file on the server of a printing press. Unless the book shipped to the customer is defective, it is seldom returned. By adopting the print on demand model, the returns problem disappears. Settlement of bills is prompt. Whereas traditional publisher issue royalty statements semi-annually, print on demand makes quarterly or even monthly settlements possible – without reserves against returns!

Do the math: 30, 40 or 50% returns for the speculative model vs. 0% for the prepaid. Case closed. Or so you would think. Yet traditional publishers cling to the topsy-turvy model of paying a lot of money upfront for books they believe will be hits, then making educated guesses on the size of the audience, then overprinting, then recovering unsold stock and remaindering it or sending it to a pulp mill.

These practices can no longer be sustained, and the good news is that they don’t have to be. Amazon has demonstrated that the prepaid model is mature and ready to replace the old speculative one like a creature that has outgrown its carapace.

In the second installment of this posting we’ll hear what a well known publishing industry oracle thinks the industry must do to prepare for paradigm shift.

Richard Curtis