This week the media is a-squabble over the death rattles coming from the book publishing industry. Yes, it's in dire condition. But a new business model might bring readers back. Call it the Free Lunch model.
An article in The Wall Street Journal portrays the publishing industry as a kind of gambling junky, hedging outrageous bets on books it hopes will succeed and dig it out of the hole — the "blockbuster trap." New York magazine's feature this past fall, depicting publishers' drops in sales and mercurial corporate bosses, was titled simply, "The End." Yesterday the New York Times discussed how publishing execs are forgoing time-honored industry traditions just to cut costs. Just how screwed are these companies?
They're certainly getting hit from all angles. Giant retailers like Borders [BGP] and Barnes and Noble [BKS] maintain crushing power over publishing companies, that have few other book stores to sell to. That means the publishers have to pay extra for good placement on sales floors, and are forced to keep up the Depression-era custom of taking back unsold book stock and shredding them.
To make matters worse, corporatization has instilled in the industry an ever-desperate drive for better year-over-year numbers. Big successes like Dan Brown's Da Vinci Code mean unattainable standards for the next year, and that makes the top brass rightfully nervous for their jobs. When there's no growth, heads roll.
Then there's Amazon [AMZN], which scares the hell out of publishers with its demonically successful little gizmo, the Kindle. Even though books sold to Kindle owners mean money for publishers, it (like Amazon in general) steals revenue from the brick-and-mortar stores on which they depend. According to NYMag, publishers are "waiting in their bunkers" to see how all of these factors will play out.
Doesn't all this sound familiar? Wasn't it just a few years ago we were huddled around another wheezing media industry?
The music business was supposed to die, too. Then came the advent of the iTunes store, capacious MP3 players and phones, Amazon's DRM-free tracks, subscription-based Web radio — all revenue streams that had never existed. Can books learn something from music?
The Goliath that the music business sought to fight was the Internet, and fight it did. But then it changed its tune, first vending to electronic music stores like Apple's [AAPL] and then even ceasing to sue file sharers, who were the nexus of the piracy and copyright violations that were hurting CD sales. Granted, the music industry isn't cheerful by any means these days, but at least it's got its survival tactics in place.
The resuscitation took three things: cheaper media, new hardware, and the willingness to let a product be given away for free.
That's why I'm calling the model the Free Lunch model. As we all know, there's no such thing as a free lunch. Tolerate people sharing music (either with P2P sharing or with DRM-free tracks) and you lose revenue, but you create music fans who will probably eventually buy your product — they're not really getting it for free, in the end. (Seeding consumers with free product is nothing new; Red Bull, to pick one example, has been doing it successfully for years.) New albums don't hit P2P networks right away, and P2P-gotten albums are often incomplete or poor quality, so eventually listeners will be compelled to open their wallets. Once the music business agreed to reasonable prices ($10 for an electronic album, instead of $18 on CD) and offered an easy way to buy, customers did just that.
Book publishers need to learn the same lesson, even if begrudgingly.
Google's [GOOG] new book search, discussed today in the Times, will be one unforeseen ally. The company has ambitiously scanned in over 7 million books into its database, many of which (about 2 million) are still under copyright. At first publishers sued. Once a settlement was reached, the parties agreed on a revenue sharing model that will give Google 37% of all ad money collected on the pages of copyrighted books, and the rest will go to authors and publishers.
That agreement is just the beginning of what Google's book search can do for publishing. Those ads sold on the millions of scanned pages are, like every other Google ad, content-oriented. If a user is reading an out-of-print book on Jewish history, why not have Houghton Mifflin sponsor an ad for Foer's "Everything Is Illuminated?" That's the kind of super-targeted advertising that most companies dream about.
Referral plans are another instrument that could be useful for publishers. Right now, Amazon offers a music affiliate plan that kicks back 20% of an MP3 sale brought in by a hyperlink by one of its affiliates, who may have mentioned or reviewed that album or artist. (Apple has an affiliate plan as well, though it offers only 5%.) If people who write about or review books are incentivized to link to buying options, that equals more books reviewed, and more books sold. That's marketing that the publishing companies desperately need but can't afford.
Lastly, publishers need to embrace Amazon's Kindle, Sony's [SNE] E-Reader, and all those folks who, for some reason, want to read books on their iPhones, BlackBerrys. and Android phones. Kindle allows you to buy books for only $10, instead of the usual hardcover rate of $26. That's exactly the kind of pricing compromise that the music industry needed to reconcile with. A book just isn't worth $26, no matter how you cut it; that kind of money could buy a week's worth of food. (If, of course, you like pizza, burgers and tacos.) Yes, the Kindle is expensive now, but it can still save you money over book-buying, and prices will inevitably come down.
Kindle's critics have muttered that the device is a Trojan horse — that once Amazon gets people into the e-reader book format, publishers fear they'll try to create a completely vertical business, from acquisition to e-publication.
Was the iPod a Trojan horse? Of course not. Someone still needs to slog through the "slush pile" of manuscripts that deluge agents and publishers every day, just as record companies are still needed to find musical talent, grow and edit it. Sure, easier distribution means that big-name groups like Radiohead have jumped outside the traditional music industry system, and so could-big name authors. But only a few mega-successes like the late Michael Crichton could expect to succeed by doing the same.
People will never stop reading; they've simply come to expect more economical and convenient options than yesterday's hardcover books can offer. That's not too much to ask from an industry that hasn't changed much since Roosevelt's days. Is it?