Publishers and the Smiling Curve

Profits are up at major publishing houses, so why aren’t more people in the biz smiling? Ben Thompson over at points us to a curve that might explain those frowns. It’s called the smiling curve, and it represents the value added to a product by three phases —Development, Fabrication, and Marketing — that it goes through on its journey from concept to sale:

smiling curve


One way to understand this chart is to think of the height of the curved line not only as value but also as profits. Adding more value should allow leverage for commanding more revenue. So the company on the far left that develops the product and holds patents (or copyright) adds a lot of value and can extract that value in earnings. On the far right, you have the parties that can reach customers and drive sales, which also adds a ton of value and leads to large revenues. In the middle, you have fabrication.

Fabrication is crucial, of course, but the problem fabricators face is stiff competition. They are handed the product design and specs, and are simply tasked with assembly and packaging. While all three of the above phases are replaceable (customers can seek out a different product altogether, replacing the party on the left; or they can shop elsewhere, skirting the parties on the right), fabrication is by far the most fungible of the three. When a contract expires, a developer can shop around for a different assembler and negotiate better prices. The fabricator hasn’t invested in its own product designs, and they don’t control access to the buyer.

How does this apply to publishing? For the longest time, major publishers have held sway in both the left and right side of this smiling curve —where all the value is added and where all the profits reside. Their command of both sides was largely due to lack of access both to packaging and retail. They became necessary connectors between the people with the copyrightable material and the eventual sale of a finished good.

Think of the author as the person who works in the lab all day coming up with new patents and product designs. The scale needed to manufacture an actual product and reach a sales force was well outside her reach. She made up the R half of the R&D seen on the left side of the curve above. The development required the publisher’s editorial and art departments. It also required their contacts with printers in the middle of the curve and their access to retail chains, sales reps, and media outlets that comprise the right side of the smiling curve.

But all that has changed. Ben Thompson gives us this graph:



Ben is concentrating here on news and periodical publishers, hence the Google/Facebook/Twitter triumvirate on the right hand side. But it’s easy to see how Amazon/Apple/Kobo fit the same mold for books. With access to one-time development tools and services, writers now comprise both the R and the D on the left side of the curve. More importantly, the move away from print has minimized the role of large overseas printing presses, warehouses, and physical retail spaces. The center and right side of the curves have changed dramatically. Publishers have shifted down to the position of manufacturer or packager.

A common theme on my blog and in my thinking about publishing is that two parties matter most of all: The reader and the writer. Everyone else is optional, and their status depends on how much value they add to the relationship between the reader and the writer. We see this in Ben Thompson’s curve. The content creator is highly valued, as is the facilitator of discovery. Ben links to a New York Times article by David Carr on the power Facebook has among publishers right now. Driving readers to content is highly valued. Readers will remember who wrote the thing they loved and where they discovered it, which drives up the value for both parties. Readers will not remember or have much interest in who packaged it. This is a major problem for publishers.

To boil it down to its essence, what is it that readers love? They might say “books,” but press them further and they’ll talk about their favorite writers/stories or the places they shop/read. The content and the discovery. Practically no one will mention an imprint at a publishing house or a major publisher. These are the lowest value-add to the equation. They are the center and bottom of that smiling curve. That’s not to say that publishers don’t add any value — they certainly do — but what they add is miniscule compared to the manuscript and the store window. This is especially true as that store window becomes device screens and hyperlinks, which they do not control. They are also the most replaceable or fungible of the three parties.

In his brilliant piece on this dynamic, Ben points out the case of German news publishers who took Google to court to get paid for the news snippets that Google showed in its search results. The publishers wanted a bigger cut from the company (Google) that provided them the most access to their readers. Sound familiar? Well, Google’s response was simply to remove those snippets, which caused traffic to those German publishers to absolutely tank.

The result? Those publishers came crawling back. What the publishers glimpsed, perhaps, is that they now occupy the lowest center of the smiling curve. They no longer control the D half of the R&D. The snippet and the search results page have become the new package, not the delivered newspaper. The publishers also no longer control the marketing — proprietary search algorithms and the ubiquity of Google’s homepage now provide discoverability and access to the reader.

As Ben puts it:

The general takeaway is that Google proved it was adding value to the publishers, but I have a different angle: the publishers demonstrated that they provide no value to their writers.

He also says:

All of this is because of the Internet: by removing friction it removes the need for folks in the middle, and the result is that value will flow to the edges. In the case of publishing that is aggregators on one side, and focused, responsive, and differentiated writers and publications on the other.

Ben points out what many have seen as parallels in other entertainment sectors: HBO’s announcement to sell its shows direct to the consumer. Netflix bypassing the studios in the creation of material — and then the retail channels represented first by Blockbuster and then the postal service. And then there’s the number of self-produced entertainers who have used iTunes, YouTube, and Amazon to reach customers semi-directly.

Over the last two decades, networked computing has restructured where parties lie along the smiling curve. The pressure on those in the middle is coming from both ends, and it is coming from content creators and consumers. Word-of-mouth across social media is the new marketing machine, and no one but the customer has their hands on those levers. Meanwhile, the production of a finished, polished package is now in the hands of the person with the original idea. It is as if a sketch and a patent can come suddenly to life, while a technology company like Google, Facebook, Twitter, Amazon, or Apple can make that product available to whoever wants it.

Anyone not celebrating these events must not understand them, or they must not understand who exactly stands to benefit. Which will be the subject of my next blog post, as I look at how we confuse David for Goliath, and vice versa. For further reading, check out this other piece by Ben. Equally insightful.

23 responses to “Publishers and the Smiling Curve”

  1. Good stuff, Hugh and Ben.

    Here’s what I find fascinating. Amazon is certainly squeezing publishers, because it of its triple threat. It opened up for authors to self-pub, it publishes its own titles, and its website functions as its own marketing campaign.

    By allowing authors to self-pub, the Big 5 no longer have an oligopoly on authors. By starting its own publishing wings, Amazon no longer needs the Big 5 for content. And since is a destination people want to go to, simply being listed is its own kind of marketing–something Hachette has learned since Amazon made those titles less convenient for browsers to buy.

    And yet… writers still defend publishers.

    Those writers who are deciding to stick with their Big 5 corporate masters are going to be stuck on the low part of the smile. They have no control over their rights, which means they can’t bring their work to market quickly, can’t adjust price, can’t change covers, and are at the mercy of their publisher when it comes to where their books are sold.

    Who would want to buy tickets on a sinking ship, then declare it isn’t sinking?

    Unless we’re a mega-bestseller who gets into the paperback racks at CVS, we no longer need fabricators to reach readers. There should be a mass exodus of authors leaving publishers.

    Why isn’t this happening?

    For the mega-bestsellers, it’s obvious. They’re siding with their business partners, who made them rich. With midlisters and newbies, it’s either Stockholm Syndrome or the Lottery Dream.

    Self-publishing doesn’t guarantee you’ll become successful–that’s all about luck. But if I had to stay afloat, I’d prefer having a life jacket than an anchor chained to my neck.

    1. I don’t think it’s so much Stockholm Syndrome (or even the Lottery Dream) as the quest for legitimacy. Self-publishing lowered the bar to essentially zero, and since anyone can do it, many authors felt (and feel) going that route lacks legitimacy. People like Hugh are the most visible authors putting a stake thru the heart of that idea, but every author who makes a few hundred bucks off their work, where they would have made nothing before, are the ones who are burying it.

      Still, self-publishing means sticking your neck out and testing your work in the real world. Some writers are afraid to do that and mainstream publishers and their allies (some of them) have been stoking those fears. No doubt they will try to continue to do so.

  2. Great stuff, definitely. It’s an idea I had tried to express in a couple of blog posts before, but never remotely as well. I like the idea of the smiling curve.

    What strikes me in all this, is all the people who say: “wait, publishers are trying to adapt, and they’re adapting: look at all the efforts in the marketing to experiment with social media!”.
    I get that publishers are adapting, and changing. Thank god btw! What I don’t get is how much time it is taking for them to realise that they have lost 80% (or more) of their value-add, as pointed out in this blog post (and many others, not all by indies…).

    When a service loses 80% of its value, what you generally do is discount it… Sell it for 20% of its original price (if that’s sustainable, if not, you discount it all you can and hope for the best). But here publishers carry on with the same business model, and the same level of royalties. And, yes, they’re still making lots of profits, but the question is: for how long?

    (The answer to this question might be what Joe points out: for as long as the authors working with/for them keep defending them…)

  3. Fascinating. The graphical analysis behind why I say that old publishing was built on distribution, while new publishing is being built on direct-to-consumer marketing.

  4. Both fascinating and encouraging. And it would be interesting to see where individual genres or even authors are on that curve, as their markets mature and particular stories/writers are recognized as offering specific high value. Is the erotica “brand” going up the curve on the right because people can now read it without carrying around a telltale book cover? And then it becomes more acceptable, more people write in it, more read it, and then the dreck is separated from the more skilled product? (For the record, I don’t write erotica, it just struck me as a noteworthy example.)

    Where is James Patterson on the curve, and where is his publisher in terms of value? Does the small-named collaborator for a Patterson novel slide to the right when he/she affiliates with the brand name author?

  5. I’ve thought for a long while now that if publishers were really going to survive this they should be shifting their brand value to the *editors*. There’s definitely precedent for it: although Marvel comics is clearly the center of the brand now, back in the 60s and 70s a big part of the appeal was the “Stan Lee Presents” logo that appeared on the first page of each and every book. Stan didn’t write all the books, but it certainly felt like it was his hand that guided the universe.

    Even as the web is shifting towards trusted curators (take a look at what Valve is doing with their Steam platform if you don’t believe me) the publishers are ignoring the fact that they already have a powerful curation model in place that could easily become a reason for readers to buy *every single title* published by a particular editor.

    These are the people who actually do set the agenda for the publishers, and yet they are completely hidden behind the iron wall of a publisher’s brand—which almost no one cares about.

    1. Stan Lee started by writing most of the comics at Marvel, which is what gave him credibility as he moved into more of an editor/publisher role. But you’re right about him being a good model if publishers are searching for a way to add value. It wasn’t just that he put a “Stan Lee Presents” logo on the the first page, he also tirelessly promoted the Marvel brand with his Bullpen columns, colorful lingo (Excelsior!), stickers and fan clubs and everything including the kitchen sink.

      Publishers absolutely could provide a ton of value if they had an editor/cheerleader who sought out great material and aggressively promoted a consistent brand. Both writers and readers would benefit from some enlighten cultivation.

      The problem seems to be that most of the editors at the big publishers want be Maxwell Perkins, and hang out with the elite of literary fiction and high society and not have to worry so much about what common readers are looking for. I think the reluctance to develop clear brands in publishing comes from editors and publishers not wanting to specialize, because that would mostly mean focusing on genre, and genre is so low class. So it’s more fun for them to try to promote the next literary darling from an Ivy League school while dumping romance, thriller and sci-fi out there to pay the bills.

      But imagine an editor that specialized in detective novels and promoted them with the energy of a Stan Lee. He might wear a fedora and write a daily blog in mock Raymond Chandler style. I think someone like that could sell books and solve “discovery” issues. Same in romance, sci-fi and other genres.

    2. One house that’s done this and continues to succeed doing this is sf/f publisher Baen Books (which also moved out of NYC a few years ago and is now based in the much-more-affordable North Carolina–where a Baen editor was telling me last year hes also now able to afford a big house with a big yard for his 3 kids, a home which is within about 10 minutes of their school and his workplace; this is not the lifestyle that NYC-based editors have, obviously).

      Baen (which I think is privately owned?) cultivates a brand identity as a publisher and cultivates engagement with readers on the Baen website. So there are people who consider themselves “Baen readers.” They probably don’t read every author Baen publishes, but there is brand loyalty, they know the house’s publishing program, and they’re more likely to try an unfamiliar author if that writer is published by Baen, because they trust the brand.

      So there is a successful model for this in commercial fiction. (There are probably others, too, though nothing is coming to me just now.) But it’s still an unusual business model in the publishing world.

      Harlequin branded heavily by publisher for years, using imprint guidelines, editorial control, and packaging to create a reliable publisher-branded experience for the reader. The idea being that rather than developing a favorite author, you’d develop favorite Harlequin imprints and be loyal to those, rather than to the people who wrote the stories. This was very, VERY successful for them in the 1980s and into the early 1990s, but their sales have been dwindling for years–and I’ve just read a bunch of comments today about major layoffs at Harlequin this week. Editors who’ve been there for decades are being let go, lots of names familiar to anyone who’s written romance (as I used to) or who has a lot of friends writing romance (as I still do). So it may be that their branding strategies have ceased to be successful– layoffs of much senior editorial staff suggests the editorial direction of the company isn’t a sparkling success anymore…

  6. Whenever I hear traditional publishers try to explain the value of their role, I think of this scene from Office Space:


  7. I think you’re dead on about the two sides of the smiley faced diagram. One thing I’d like to point out though is that all Content Discovery places are not created equal.

    For example, you mentioned “it’s easy to see how Amazon/Apple/Kobo fit the same mold for books.”

    Barnes and Noble (physical stores & online) could also fit in that column. But they really don’t. In large part because they’re holding on to their traditional role. It’s sad because they (BN) technically they still add value :(

    1. B&N missed a huge opportunity by not catering to indies years ago. They’re trying to catch up, now that they see self-pub as the growth segment of the market and sales elsewhere declining, but it’s too late.

      The other problem is that they see major publishers as a customer for co-op money, which has them all twisted around and confused.

      1. Hugh, are you still having visibility issues with Wool in B&N? Recently, I saw your book face-out, and was gobsmacked.

        1. Hugh is in B&N now? That is great news, I was last in one almost a year ago and they had zero Hugh books, not even his publisher published one, looks like my boycott can end and i can go get a few copies for friends.

  8. The thing to do is put in as much value up front as we can. Put it in the hands of readers and let them do the rest.

  9. New authors know they will be empowered by the likes of AmazonAppleNookKoboGooglePlay, et. al (The New Big Five?) Instead of feeling ripped off, they find support. Instead of (sometimes harsh) rejection, they find acceptance and community.

    Yes, some indies need a bit more experience. A bit more polish. But the best place to get that is in the workplace, right? It reminds me of the first crude Web sites made by enthusiastic early adopters in the 90’s. My designer colleagues scoffed and said “They should take a course first.” and I said “They ARE! In real time!” They said “A hundred thousand bad new Web sites a day.” and I said “It’s a hundred thousand new voices a day. And I’ll be the judge of what’s bad.”

    I can’t imagine not being an independent author any more.

  10. The greatest thing about indie publishing is the volume of unexpected voices, there is so much i read that I know never would have gotten past the stiff shirts in the industry. Now a writer can truly do it on his own. Write as best you can, the way you want, put it out there for the world and stay in the shadows. That is my dream, no conferences, no sales, I want to be that unknown guy who just puts out books. If it hurts my sales not promoting myself, then i just half to write harder.
    The secret is patience. If your book is good, word will spread and time will tell.

  11. Disintermediation has happened in industry after industry, with the rise of the Internet. It is no different with publishing, and this is just the beginning of the new era of self publishing. Self publishing is the new paradigm and it is very empowering for authors, and brings opportunity for innovators. Literary agent Andrew Lownie believes that in 5-10 years, 75% of books will be self-published, and I tend to agree with him.

  12. I have created a new website at, which I want to be grand central station for all things related to self-publishing. I am open to ideas and suggestions about its development, and I have created a Self Publishing Zone LinkedIn group where people can connect and help each other navigate the self publishing process.

  13. thank you Hugh for all your great articles you are writing, it is so very educational and informative

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