Profits are up at major publishing houses, so why aren’t more people in the biz smiling? Ben Thompson over at Stratechery.com 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:
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.