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Distribution Junction

Content Crossroads By Jim Calder

Industry leaders talk candidly about issues affecting the industry—from distribution to rising costs to an increased focus on content.

Increased Focus on Content

Contrary to what some may believe, e-reader devices and the complete switch to digital content delivery is far from replacing printed books. People still love to hold books, collect them and give them as gifts. Digital technology, however, has given the industry a boost, like a can of Red Bull before an afternoon meeting. “Although the pessimists have been saying for some time now that electronic media and the Internet will put an end to the printed book, the U.S. book industry continues to do just fine,” says Bruce W. Smith, executive vice president of the Book Manufacturers’ Institute, a trade association for the book manufacturing industry. “Certainly not a large-percentage-growth industry in any sense, but the book manufacturers continue, overall, to grow their business, and suppliers of materials and equipment are doing the same. The year 2006 has proven to be an OK year for the manufacturers,” he says. “While overall publisher book sales are down compared to 2005, last year showed an overall gain [in book sales] of 6.5 percent compared to 2004.” It is important for publishing companies to not think in terms of books vs. Internet, but to realize that their value is their content, in whatever form it is distributed. “I think this is a time of unprecedented change for instructional-materials publishing in general ... books, periodicals and digital learning products,” says Charlene

Book Business | FEBRUARY 2007

Gaynor, executive director of The Association of Educational Publishers (AEP). “The urgency for publishers to move away from thinking of their book as their asset to thinking of their content as their asset is intensifying.” One of the challenges in the educational sector seems to be seeing the value in technology. “It’s not that they fear technology, but for some it’s seen as a sinkhole they throw money into. They don’t yet know how to make money from their investments in technology,” Gaynor says. According to Michael Healy, executive director of the Book Industry Study Group (BISG), these are early days in a period of transformation for digital distribution. “As we move through 2007, I think we will see several large publishers and service providers investing significant sums of money in the development of digital asset distribution systems,” Healy says. “We have seen already mass digitization of the backlist titles, and these ‘electronic warehouses’ are increasingly being integrated into digital workflow systems for frontlist books. I suspect this will transform

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the distribution of content in the value chain and prompt many businesses to re-examine traditional distribution and business models.” Improving your online-content value seems second nature to most these days. However, when a publisher feels it is losing money and sales because of the Internet, it is a different story. Patricia Schroeder, president and CEO of the Association of American Publishers (AAP), says, “Overall the industry is stable and growing, but the problems and challenges cluster around the digital world.” For the AAP, those challenges in the digital world continue to focus on Google. Are Book Search Tools Taking Away Your Online Opportunity?

“Google has a great business model—[to] take what someone else has spent a lot of time and money creating for free, post it, sell ads around it and make lots of money,” Schroeder says.

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he hot-button issues in the book industry today surround an increased focus on content and alternative forms of distribution. Publishers are still keeping a watchful eye on the Internet and the fear that it may replace the print-based distribution business in the future. But there appears to be a greater acceptance and realization that “content” is a publisher’s real asset, and that the delivery method means nothing if the content isn’t outstanding. An increased focus on content, book search tools, digital distribution, a declining print readership, increased used-book sales, rising fuel and paper costs, and decreasing bookshelf space in retail superstores are all factors that are leading publishers to take a closer look at how they distribute their product in 2007. As the year begins, it is important to look toward industry leaders for insight on these issues.

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( Cover Story ) “It’s all part of valuing the content, then delivering it in whatever medium the customer wants.”

“We don’t believe that the printed book will ever be totally replaced by electronic digital publications.”

– CHARLENE GAYNOR, AEP

– Tom Turvey, Google Book Search Partnerships

The following figures compare 2006 book sales to 2005 sales as of mid-December 2006, according to The American Association of Publishers (AAP): The following segments saw increases in sales: 13.8% 7.5%

Adult Mass Market

6.5%

University Press Paperback

4.2%

University Press Hardcover

3.1% 2.0%

Adult Paperback

Professional and Scholarly

1.0% Children’s/Young Adult Paperback

The following segments saw decreases in sales: -1.0% Adult Hardcover -5.5%

-15.4%

-32.5%

Elementary/High School, K-12 Audio Book

Children’s/Young Adult Hardcover

Source: American Association of Publishers (AAP)

34.2 percent in October 2006 and a yearly increase of 26.2 percent as of mid-December. “The economics of digital distribution are so much better you’d think publishers would be rushing toward it,” Gaynor says. “Instead, there’s the fear that books will become obsolete. It’s all part of valuing the content, then delivering it in whatever medium the customer wants.” Gaynor explains if a teacher needs a lesson in a hurry, the price she would be willing to pay for instant delivery could equal or exceed the cost of the printed book. However, if the content and ideas are not valuable, it doesn’t matter in what form the content arrives. “This year in California, instead of a traditional social studies textbook, Pearson Scott Foresman introduced a custom-built digital curriculum,” Gaynor says. The program combines online learning, multimedia, audio, text and traditional classroom activities. “Pearson’s investment in digital asset management opened up new product possibilities and put them ahead of the curve. They’ve set the standard other educational publishers will need to follow to remain competitive.” Not everyone in the industry believes in the rush to digital distribution, especially on the manufacturing side. “The digital delivery of content may eventually impact the printed product, but in many key book markets, e.g., education, it is providing ancillary and supplemental support to the printed product at present and likely for many years to come,” Smith says.

Used Books a Bigger Factor Than Most Believe

Used-book sales are on the rise, and this creates more competition for publishers’ products and increased awareness in alternative forms to traditional distribution. According to Schroeder, if a consumer knows what they want, they will go to Amazon.com or other sites, but that if they just want to browse they will still make the trips out to the bookstores. “If they can go directly to the publisher, they just might,” she says. In 2004, used-book sales topped $2.2 billion, representing more than 11 million used books sold and 8.4 percent of total consumer spending on books according to BISG’s “Used-Book Sales: A Study of the Behavior, Structure, Size and Growth of the U.S. Used-Book Market.” “There are many factors behind the increase we are seeing in used-book sales, but in my view the most important is the visibility of the used book, enabled by the development of Web-based bookselling,” says Healy. According to Healy, large booksellers like Amazon.com and Barnes & Noble have increased significantly their coverage of used and out-of-print books. Another factor is the development of compelling used-book sites like AbeBooks.com.

Declining Print Readership

Higher Education

Schroeder believes that if people know what they want, digital publishing works. “I think distribution will change a lot, but when and how fast is a tough guess,” she says. “Our profes-

sional and scholarly publishers are into electronic and digital distribution big time. K-12 publishers are not into it. Many trade publishers are getting ready or are already able to do digital distribution.” Schroeder remains cautious because even though the highereducation publishers produce almost all of their books electronically, and they are significantly cheaper than regular textbooks and being sold to a younger tech-savvy audience, they have not caught on. “If the younger generation wants a hard-copy book, the digital revolution is probably going to happen when print-on-demand is available everywhere and is inexpensive,” she says. According AAP research, e-books saw an increase in sales of

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Digital Distribution

– George Jones, BORDERS GROUP

percent in literary readers from 1982 to 2002, focused on literary works, not nonfiction books, Schroeder says. “Recently, Americans have been in a very serious mood and reading a lot more nonfiction, so that should be taken into account.”

Google, on the other hand, sees its project to make the full text of books searchable online differently. “The important point is that we’re helping readers find books,” says Tom Turvey, head of Google Book Search Partnerships. “We believe very strongly in copyright protections, and rewarding authors and publishers for their creative efforts, and we’ve designed Book Search to comply with international copyright laws.” AAP and the others who have lawsuits against the Google Book Search Library program believe that if the creators want to give Google permission, that is one thing, or if the creators feel they should share some of the ad revenue generated by their creation, they should be able to negotiate that. Despite the lawsuits, publishers need to decide for themselves if Book Search services will help or hurt their bottom line. For books no longer in copyright, users will be able to freely view, browse and read these materials. For books still under copyright protection, “If publishers or authors don’t want to have their books digitized, they will be excluded,”Turvey says. Schroeder believes Google Book Search tools are taking business away from individual publisher’s Web sites. “Publishers and authors also sell digital books, so Google has taken a big market away from them by digitizing copyrighted works in libraries,” she says. Turvey states that publishers understand that Google is bringing additional interest to their books from searchers who may not have known a particular book existed before searching for a topic online. “By marketing books online or by offering new access to books online, publishers and authors can find new audiences for their works,” he says. According to a survey reported in the August 2006 issue of Book Business, 58 percent of book publishing industry executives who responded said they feel that book search tools have a positive impact on the industry. Twenty-seven percent were unsure, 9 percent said they have a negative impact, and 7 percent said they have no impact. As more books are published every year, it becomes harder for readers to find what they are looking for. “This doesn’t mean they’ll be reading these books online, but they’ll be finding them there,” Turvey says. “We don’t believe that the printed book will ever be totally replaced by electronic digital publications.”

“So we are going to be more aggressive with closing underperforming locations going forward.”

As print readership declines, publishers will want to at the very least explore tapping into the interest of the “iPod/text message” buying power, by improving their content and adding elements of alternative distribution, suggests Smith.“Certainly, declining readership in the U.S. is a problem,” he says. “It impacts not only the number of books that will be produced and read, but, more importantly, the future of our country from an education standpoint.” Smith believes that readership initiatives in the United States can, and hopefully will, have a positive impact on the trade and juvenile segments. “Looking at research on how young teens get and communicate information can be scary … very scary,” Gaynor says. “But we don’t believe that text messaging will ever take the place of a textbook or a trade book or a workbook.” It is important to point out that the 2004 “Reading at Risk: A Survey of Literary Reading in America” study by the National Endowment for the Arts, which showed an overall decline of 10 Visit bookbusinessmag.com/infocenter

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( Cover Story ) “As a result, customers who had originally intended to buy a new copy are often attracted by lower-priced used versions of the same title,” says Smith. Compensating for Rising Fuel and Paper Costs

If we see another large spike in fuel and paper costs in the coming year, publishers may want to look further into digital distribution and print-on-demand distribution to offset costs. According to Smith, the majority of manufacturers are absorbing rising fuel costs.“In rare cases are they are able to pass these costs on to their customers,” he says. However, when it comes to increased paper costs, most of the paper used by book manufacturers is customer furnished and owned. “So it is a publisher cost factor,” Smith says. “This does, however, lead the publisher to push to offset their rising paper costs by obtaining lower manufacturing prices from the manufacturer.” Gaynor claims that many publishers are turning to offshore printing as a solution to combat rising fuel and paper costs. “Outsourcing, outsourcing, outsourcing. I don’t know a publisher who is not at least exploring offshore printing and production as a means of reducing cost,” she says. “Also publishers are converting to XML-type production processes at a much quicker rate in order to realize the efficiencies and repurposing opportunities.” Declining Bookshelf Space

Declining shelf space for books in stores resulting from situations such as Waldenbooks closing down several of its stores will lead publishers to investigate alternate forms of distribution in 2007. Borders Group Inc. executives talked about closing underperforming Waldenbooks stores in 2007 during the Q3 2006 Borders Group Earnings Conference Call. “In the past 20 or 30 years, including us and Barnes & Noble and others, having superstores out there definitely changes the role that a mall bookstore would play. You’ve had the Internet, Amazon, people like that, but yet the mall stores have not changed very much … In my mind, it’s just not logical that would still be exactly the right mix and format to take advantage of that space,” said George Jones President/CEO of Borders Group. “So we are going to be more aggressive with closing underperforming locations going forward.” Just how many Waldenbooks stores will close this year is still uncertain. “At this stage, I don’t want to predict how many we’ll close, but we were on a path to close around 80 anyway, and it will be at least that many,” said Ed Wilhelm, senior vice president, CFO of Borders Group. There seems to be an increased focus at superstores like Borders and Barnes & Noble in remodeling and adding products to their cafés and stationary/gift sections. “The cafés, and gifts and stationary departments are the two highest-gross-margin categories that we have in the stores,”Wilhelm said. This combined with the closing of mall stores like Walden22

books ultimately will leave less shelf space out there for books, driving publishers to look for alternative forms of distribution. Despite this, over the past few years, book sales have been steadily climbing. In 2002, estimated U.S. book publishing industry net sales were $22.1 billion, increasing 4.8 percent in 2003 to $23.1 billion, according to the Association of American Publishers. From 2003 to 2004 the industry experienced a slight drop, down 1.3 percent to $22.8 billion. However, net sales for the industry are estimated to have increased by 9.9 percent from 2004 to 2005 to a grand total of $25.1 billion in 2005. At Barnes & Noble, total store sales in 2005 increased 5 percent to $439.7 million, compared to 2004. For the same period, total store sales at domestic Borders Superstores increased by 4.7 percent ending 2005 at $2.71 billion. It is important to note that these figures include total products sold including gift, stationary, music and café sales. Examine the Growth

When the BISG published its report “Book Industry Trends 2006,” it represented a major step forward in the process of quantifying the U.S. book publishing industry because for the first time the study included companies with sales of less than $50 million, according to Healy.“This segment of our industry, which is both large and growing, had been under-represented in all statistical compilations until this year,” Healy says. He believes there are reasons to be confident that we will see continued growth going forward. According to ‘Trends 2006,’ net revenues for all books are projected to top $40.4 billion by 2010. This reflects aggregate growth over a five-year period of 16.9 percent. “It has never been easier to set up as a publisher, though many might argue that it has also never been harder to succeed as one,” Healy says. Figures provided by the U.S. ISBN Agency, R.R. Bowker­— which compiles comprehensive title and publisher information—show record growth in the numbers of new publishers established and titles published, according to Healy.“I understand from contacts at R.R. Bowker that approximately 200,000 new titles were published in 2005, and more than 10,000 new publishers were given ISBN prefixes for the first time,” Healy says. “I expect the book industry to continue to grow modestly, 2 percent on average, in the coming years,” Smith predicts. The important thing to remember is that distribution will only take you as far as your content value will travel. BB For more insight into Google’s take on the publishing industry, register for the 2007 Book Business Conference & Expo, in which Jim Gerber, Google’s director of content partnerships, will deliver the Keynote Address. For more information, log on to www.BookBusinessExpo.com.

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Publishing Clip One