Two Important Publishing Facts Everyone Gets Wrong

Almost everything being said about publishing today is predicated on two facts that are dead wrong. The first is that publishers are somehow being hurt by ebook sales. The second is that independent bookstores are being crushed. The opposite is true in both cases, and without understanding this, most of what everyone says about publishing is complete bollocks.

Let’s take the health of publishers first. Below you will see that profit margins at the major publishers are either flat or improving. For three of the top publishers, margins have improved quite a bit:

Here we can see why. Margins on ebooks are much higher than the previous cash-cow, hardbacks:

We even have a slide from Harper Collins to investors showing a breakdown of these ebook profits compared to hardback profits:

So while revenue is down in other formats, the explosion of revenue in ebooks more than makes up for it:

Nearly three BILLION dollars of new revenue, which is more than double the $1.2 billion lost elsewhere.

Overall revenue is therefore up:

If ebooks are doing so well, bookstores must be going bust, right?

Only some of them. The large big-box discounters, who overbuilt in the retail boom of the 80s and 90s, are indeed suffering. Meanwhile, the independent bookstores that those big-box discounters nearly pushed into extinction are roaring back. While over 1,000 stores closed during the B&N and Borders expansion leading up to 2007, since 2009, the number of indie bookstores has risen over 20%. And sales are up over 8 percent year on year the past three years, which is far more growth than the overall book business.

What happened? I liken it to the rescue of Yellowstone National Park when the Canadian Wolf was reintroduced to that ecosystem. An overpopulation of deer was leading to the destruction of saplings due to bucks rubbing their antlers and destroying trees. Fewer trees meant more erosion. The landscape was changing, and species downstream were being pushed to the brink. Bringing the wolf back restored balance and saved those downstream species.

At an O’reilly Publishing event this year, I presented this as my Roshambo Theory of Book Distribution. It looks like this:

Each of the three entities dominate their clockwise neighbor in some crucial aspect while being vulnerable to the neighbor on the other side in an equally important aspect.

Let’s start with the big-box discounters, which came into being at the same time other retail channels were expanding (like WalMart, Target, Home Depot, Lowe’s). With far superior selection and prices, they drove out their competition, which had smaller footprints and higher prices:

Over 1,000 indies closed during this time. Tom Hanks and Meg Ryan made a movie that was more about this than about AOL, despite the title (You’ve Got Mail) coming from the latter.

In the mid to late 90s, retail began moving online. Suddenly, the biggest strength of the big boxes — price and selection — paled before the power of “everything stores.” Borders bookstores went under in 2011. B&N has been showing quarterly losses, even as it closes stores and shrinks shelf space within existing stores. The advantage in one direction became a serious weakness in the other, as the big boxes couldn’t compete with online retailers:

Independent bookstores, meanwhile, have advantages that online retailers don’t. Physical location, immediacy, hand-selected curation, a focus on local topics and authors, community events, fresh coffee, browsing, personal help, and so on. These are all things that the big box discounters did well enough that their advantage in selection and price was able to dominate. But online retailers are too weak in these areas to push out independents:

At first, it appears that each of the three parties has an advantage that trumps one other. The problem here is that big box discounters don’t excel enough in either area (physical space or price/selection) to beat the others. In fact, what looks to be a balanced ecosystem between three retail paths will probably devolve into simply online and independent booksellers (the latter will form regional chains). There are enough people who will support independents and pay full price and enough who will shop online when they know what they need that the two will coexist.

So feel bad for hardbacks and paperbacks, but don’t feel bad for stories, storytellers, or readers. The latter trio is doing just fine. As are publishers.

And feel bad for big-box discounters if you want, but remember that they were far worse for mom-and-pop stores than online retail has been. In fact, since the advent of online retail, we’ve seen their numbers and their revenues rebound.

You can’t argue with either fact. Publishers and small bookshops are, on the whole, doing better now than they were in 2007, when the Kindle launched. That’s irrefutable. And so any conversation about the effect online retail and ebooks are having on the industry need to begin right here, rather than assume the opposite is true and then spread fear and doubt to generate clicks.