Publishing 3.0: A World without Inventory Part 1

By now it must be clear to all but a handful of diehards that the business model based on returnability of books for credit, a practice instituted by the trade book industry some 75 years ago, is no longer viable. In fact it has proven to be a bargain with the Devil.

The original principle on which it was instituted – to encourage bookshops to invest in otherwise risky literary forms like first novels and poetry – was an admirable one, and publishers can look back with pride that their good will made possible the launch of countless great works and authors. But soaring returns have rendered this practice utterly dysfunctional. Return rates approaching or even exceeding 50% have slashed profit margins of trade book publishers to single digits, no digits or negative digits.

Though the industry managed to keep a lid on returns until the latter part of the 20th century, in the post-World War II era the system deteriorated as return rates escalated, triggering cash shortages. The consequences were catastrophic: countless underfinanced houses were driven into the arms of larger ones. These big fish in turn succumbed to even bigger fish until we ended up where we are today – with a handful of bloated leviathans. But even they have discovered that immense scale offers no immunity from the same toxic business model that forced smaller houses to give up the ghost. Huge publishers may have more blood to hemorrhage than small ones but eventually they succumb too.

Yet, despite decades of proof that returnability is a sucker’s game, the publishing industry is incapable of curing its addiction to the practice.

The time has come for publishers to accept the fact, now glaringly apparent to all but those in total denial, that no business enterprise can afford to sell just half or even two-thirds of what it manufactures – and to foot the bill for the return and disposal of the unsold other half.

Some pundits ascribe the woes of our business to printed books themselves, saying that the medium is no longer appropriate for our times. In truth nothing is wrong with printed books. Everything is wrong with the way they are distributed.

And the way they are distributed is appallingly profligate, taking a dreadful toll on the environment in terms of paper waste and carbon footprints. The tortuous methods by which bookstores account to publishers and publishers to authors are imbecilic and arguably fraudulent. An alien visitor tracking the journey of a printed book today from editorial office to printer to warehouse to bookstore, back to warehouse and then to remainder jobbers or pulpers would have genuine reason to wonder whether there is intelligent life on this planet.

For over a decade we have had before us a technique for publishing books called print on demand. Those who witnessed its introduction at a book expo in 1998 declared the process revolutionary. Though it’s taken a decade or so to refine the technology, they were absolutely correct. The delivery system has matured and begun to make serious inroads on the traditional one. Though representing only 2.5% of all book production in 2009, it is expected to grow at 16% per annum according to David Taylor, president of Lightning Source, the nation’s biggest POD firm. The first generation of Espresso POD machines, now being installed in libraries and bookstores, promises to expand the technology’s popularity even further. As anyone who has seen a demonstration of the Espresso can testify, the process itself is a technological miracle and will most certainly be miniaturized. It is easy to imagine a day when POD kiosks – in bookstore or non-bookstore venues – will issue books from an infinite inventory of digitally stored titles.

But it is not just the technology that is so exciting to contemplate.  It’s the business principle underlying the process that promises the invigoration and perhaps even the salvation of printed books.

The Speculative Model

In today’s traditional model, which might be termed “speculative,” publishers relying on information gathered from booksellers make educated guesses about how many copies to print and distribute. The sale of a book occurs only after it has been published, placing the burden of financing its publication squarely on the shoulders of the publisher. To the degree that the publisher’s forecasts are incorrect, unsold copies will be returned. Settlement of retailer accounts are delayed or adjusted while returns are processed, delaying desperately needed cash flow to publishers. Publishers in turn must delay settlement of royalties to authors for months and even years until returns calculations are finalized.

In short, the entire system is founded on a negative principle: it’s not how many copies of a book are sold, but rather how many are not returned. Everybody in the chain suffers, from bookseller to publisher to author. Even readers suffer because the cost of all this inefficiency is passed along to them in the form of higher book prices.

The Prepaid Model

Now consider the business model created by print on demand, which we’ll call “Prepaid”. When a book is ready for sale it is displayed on the website of a publisher, author, retailer, or all three. Customers may browse or sample it online. When they decide to buy it they purchase it on the website, charging it to their credit card. Until that moment the physical book does not exist: it is simply a digital file on the server of a printing press. Unless the book shipped to the customer is defective, it is seldom returned. By adopting the print on demand model, the returns problem disappears. Settlement of bills is prompt. Whereas traditional publisher issue royalty statements semi-annually, print on demand makes quarterly or even monthly settlements possible – without reserves against returns!

Do the math: 30, 40 or 50% returns for the speculative model vs. 0% for the prepaid. Case closed. Or so you would think.  Yet traditional publishers cling to the topsy-turvy model of paying a lot of money upfront for books they believe will be hits, then making educated guesses on the size of the audience, then overprinting, then recovering unsold stock and remaindering it or sending it to a pulp mill.

These practices can no longer be sustained, and the good news is that they don’t have to be. Amazon has demonstrated that the prepaid model is mature and ready to replace the old speculative one like a creature that has outgrown its carapace.

In the second installment of this posting we’ll hear what a well known publishing industry oracle thinks the industry must do to prepare for paradigm shift.

Richard Curtis

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4 Responses to Publishing 3.0: A World without Inventory Part 1

  1. How refreshing! A publishing professional who understands the reality of the digital and POD world. As an author who has published with a “big NY publishing company” and with a Small Press, (Wild Rose Publishing) it’s clear to me that the POD/Ebook format is better for the environment, more cost efficient for publishers and good for the customer. Not to mention as as author I will be paid every 4 months.

    Last week at a book event at Third Place Books in Seattle, all my books were printed on site. It took 10 minutes for each one on their Espresso Machine.

    You are so RIGHT! The future is here, but for some strange reason the blinders are on with the big 6.

    That’s good news for small presses.

  2. Stu Miller says:

    Hi Richard: A “print” button would be enormously helpful on this otherwise near-perfect site to make it easier to read your timely and interesting remarks. Is there a reason why you haven’t included one? Thanks. Stu

    • @Stu Miller – A good idea. Such a good one that we’re going to install that printer button at once (for printer-friendly versions without the pictures).

      Thanks for following!
      RC

  3. Dave says:

    How refreshing! A publishing professional who understands the reality of the digital and POD world. As an author who has published with a “big NY publishing company” and with a Small Press, (Wild Rose Publishing) it’s clear to me that the POD/Ebook format is better for the environment, more cost efficient for publishers and good for the customer. Not to mention as as author I will be paid every 4 months.

    Last week at a book event at Third Place Books in Seattle, all my books were printed on site. It took 10 minutes for each one on their Espresso Machine.

    You are so RIGHT! The future is here, but for some strange reason the blinders are on with the big 6.

    That’s good news for small presses.

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