Friday, 23 April 2010

Fundamentally flawed

Good, longish piece about the strategic choices facing the publishing business. Publishers don't seem very well equipped to survive, at least as chief arbiters of what gets turned into a book. They're being disintermediated as it's put in the securities business, but they're stuck:
Tim O’Reilly, the founder and C.E.O. of O’Reilly Media, which publishes about two hundred e-books per year, thinks that the old publishers’ model is fundamentally flawed. “They think their customer is the bookstore,” he says. “Publishers never built the infrastructure to respond to customers.” Without bookstores, it would take years for publishers to learn how to sell books directly to consumers. They do no market research, have little data on their customers, and have no experience in direct retailing. With the possible exception of Harlequin Romance and Penguin paperbacks, readers have no particular association with any given publisher; in books, the author is the brand name. To attract consumers, publishers would have to build a single, collaborative Web site to sell e-books, an idea that Jason Epstein, the former editorial director of Random House, pushed for years without success. But, even setting aside the difficulties of learning how to run a retail business, such a site would face problems of protocol worthy of the U.N. Security Council—if Amazon didn’t accuse publishers of price-fixing first.

Doesn't sound a great place to be - sitting in the middle and being eaten alive. On the one side are Amazon, Apple and Google, who are dealing the whole bookselling business a double whammy: the low price, high volume, direct route to the consumer is undercutting bookshops; their market power and the rapidly growing ebook format are also driving down publishing margins potentially making big, traditional publishing totally unprofitable. On the other side are authors, from established to fledgling, who are increasingly likely to sell direct to their readers usually through one of the new players. The biggest question posed by the article it seems to me is who is going to gobble up most of the publishers' pie?

More generically, the catastrophe that's looming for traditional publishing fits well with this analysis of why complex business models collapse (it's by web guru Clay Shirky).

By the way, the author of the article is Ken Auletta, who about twenty-five years ago wrote 'Greed and Glory on Wall Street: The Fall of the House of Lehman'. I recently re-read it as I wanted to be reminded of the last time Lehman had 'fallen', in the early '80s (that time the firm had survived, it just lost its independence). It had also nearly gone bust in the early '70s and a number of times before that.

Securities businesses - that is ones that broke and trade shares, bonds and nowadays derivatives - have a tendency to do this once in a while. Like sheep they can sometimes suddenly and without much warning go tits up. They trade over-aggressively and get stuck with unmanageable losses when the market changes. That this happens to one or two every few years is really unavoidable. Unfortunately for us, nearly all banks today incorporate a large securities business.

Few in the UK appear to be taking financial reform very seriously despite it being, after the deficit, the most important issue the country faces. There's only one real long-term solution to the risk presented by the City's unprecedentedly large securities operations and that's to shrink them. They need to be made less important, more manageable, more easily killed or rescued. To get from here to there you could make the business less profitable by hugely increasing capital requirements, or you could reimpose a split between commercial and investment banking, or both; and I'm sure there are other solutions.

Unless we do this, when the next securities business goes bust we won't be able to let it fail without the rest coming down; but we won't have the resources to do so, it will be too big. As a consequence, the whole lot will come tumbling down after all, the financial system will collapse and the country will go bust too. Global depression will ensue.

Not that anyone cares. I'm not optimistic anything substantive is going to happen (cf. Shirky above). Anyway, what was that about +/-1% on employers' national insurance?


Sean said...

Well getting your point men, in this case the BoE back in charge of risk will be a big step forward, I am sure if that is done they will request the powers and changes that would best work.

Evolution not revolution works best afterall its revolution in the form of the FSA that helped turn a bad dream into a nightmare.

Also accountants need much more "duty of care" legal requirements on their work. They are supposed to be the ones that present the world with accurate mathematical pictures of their subjects, they did not did they? and in the whole debate are conspicuous by their absence.

Ni, needs cutting if you really want to produce jobs, and its small and medium size organisations that produce jobs.

I would go for a debt tax, 15% standard vat and another 10% debt vat that does up and down accordingly and links people with the states liabilities, I was told yesterday by someone that the states bills are not his bills!

Bank reg solved, jobs saved and created, deficit dealt with NEXT.

oh yes Publishing....I think Rupert might have moved too soon, if you take a look at BBCs Click from 2 weeks ago they did a segment on epublishing, ereaders ect. They were in Holland and showed Epaper, this is only 2 years away and will give publishers a lot of their rights back, well worth a look,see...the game changes again.

worm said...

Interesting post!

gonna start building my little survival hut out in the woods and stockpiling paperbacks in preparation for the bookpocalypse

Gadjo Dilo said...

Yes, interesting. Mr O’Reilly publishes some excellent techie books but I wonder how well he knows the wider world of book publishing and reading: Harlequin Romance and Penguin paperbacks as (and then only possibly) the sole examples of houses with whom readers have a particular association? I feel an association with many niche publishers (albeit probably now owned by much large concerns); perhaps he wasn't concerned with the small-fry.

Vern said...

I am sceptical about all these apocalyptic prognostications. Things will be bad, but I doubt they will be that bad. Authors can only sell direct if they have already established themselves as a name; otherwise they are even less of a brand than a publisher's mark.

Who is to winnow and sift the shit?

Something like 750 000 books were self-published in the states last year; hardly any of them will have sold above double digits.

I'd also say that it's only Penguin Classics and not Penguin per se that works as a brand. Certainly Penguin is no more of a brand than Faber/Canongate/Granta. I mean Penguin just published Chas Newkey Burden's Brangelina biography for Pete's sake. Brand my ass.

Hey Skipper said...

The problem with regulation is that it is harder than it seems, and nearly always entails unintended consequences: the S&L collapse of the 80s led to regulating ratings agencies which, in turn, gutted the whole concept. (There are other examples in the link)

If I was Head Dude What's in Charge for a day, my regulations would be aimed at two things: transparency, and limiting leverage.


As for the publishing business, I think it is primarily bookstores that are on the dodo bird trail.

A known publisher will still carry a quality proxy that self-published books will never match.

malty said...

Can't find any reference here for the death knell of the hard copy brigade. Odd, considering the mountains of tripe the publishers have tossed our way in the last ten years, most of which must have lost money.

Gaw said...

Sean: Lot to take in there - I'll get back to you.

Worm: There seems to be an inexhaustible supply of second hand books so you should be fine for a while.

Gadjo: Good point. I think he was referring to the big, more anonymous publishers.

Vern: I think the danger to publishers is that the online retailers will get into publishing. Google Books is already doing so. They would 'winnow the shit' and probably be better at doing so as they have a lot more market knowledge.

I agree - it's the Penguin back-catalogue (not necessarily Classics) in their attractively plain jackets that you think of with affection.

Skipper: As well as implementing some version of Glass-Steagall and/or making capital requirements for trading a lot higher, I think you need to keep the rules simple and principle-based to keep participants guessing. Also pay regulators a lot more.

Publishing's brands might be up for sale pretty cheaply in good time. I wonder whether Google might end up buying one of them?

Malty: Blimey. Didn't know whether to laugh or gibber.

Hey Skipper said...

Also pay regulators a lot more.

The problem with regulations and regulators is pronounced risk aversion.

E.g., the recent E+15 ash cloud shlamozzle.

The consequences for the economy, over the long term, could be far more costly than the occasional panic.

Beyond habitually spending less than I earn, I have absolutely no claim to any sort of financial expertise, so my opinion here is even more than typically worthless.

With that caveat firmly in mind, had the US not regulated financial ratings, but rather done the opposite -- force all transactions to be publicly available on the internet -- then bloggers would likely have provided far better results than Standard & Poors. It is that whole open-source thing.

Gaw said...

I should have expanded by saying 'pay regulators a lot more so you can hire talented investment bankers to work in the field and seriously incentivise them.' This post is excellent (and very amusing) on financial reform and is from a blog that's generally and often uniquely spot-on with regard to the world of finance.

Ratings are an interesting topic in that agencies used to be paid out of subscriptions charged to interested investors. For reasons that escape me this was changed to a charge levied on issuers. Lord knows why as it does seem to create an egregious conflict of interest. It may well be that the desire to make uniform - occasionally a misplaced desire on the part of regulators - encouraged this development. Blame the SEC (again)...