Open letter to Hachette CEO Arnaud Nourry: Kill your hardback business

Sir:

I read with interest your comments in the Financial Times of August 31, 2009, regarding the fact that “unilateral pricing by Google, Amazon and other e-book retailers such as Barnes & Noble could destroy publishers’ profits and kill the lucrative trade in hardbacks.” I write to warn you that, if your primary concern is retaining the profit in hardbacks, you will repeat the errors of numerous of C-level peers in media companies, from newspapers and magazines to the music and television industries. Instead, you should be prepared to wipe out your hardcover profits over the next five years to retain your relationship with readers. The real reason Amazon is selling e-books at a loss today is to take the demand-creation relationship away from you.

The hardcover is a package for printed content. Despite it’s wonderful history, the codex form factor in its various sizes of hardbound pages, is just a package, albeit one tightly bound up in the distribution processes traditional to publishing. The hardback book has led the publishing parade for centuries, but has given way in the era of industrial publishing to paperbacks, so that now far more than half the books published are never released in hardback. Hardbacks are seldom profitable, despite what the FT article says, relying on unexpected hits to produce the lion’s share of profit at a publishing house. Predictably successful hardback first editions, such as the upcoming Dan Brown novel, The Lost Symbol, are less profitable than the surprise hit because of the deep discounts demanded by retailers online and off.

Hardbacks are the best way to test the market for viable trade paper titles that will thrive in your midlist, because they are more likely to end up in discount bins than as returns. Rather, I should write “Hardbacks were the best way…” as the e-book is poised to take the place of hardbacks as first-edition-to-market because they can be sampled by chapter and, even, given away to spark readership wildfires. Newspaper companies failed to see that preserving the newspaper killed the news that made the daily edition valuable. The form factor in newspapers and books are deeply integrated into the distribution systems on which these industries rely. Moving books or morning editions from place to place has been the key to profitability for publishing since before any of us were born. It’s over, as newspaper companies prove daily.

Distribution is no longer the hard problem in publishing or any form of information delivery. It’s a competence that Hachette should shed in favor of outsourced relationships with, among others, Amazon and Google. Amazon can move books much more cheaply than any publisher. They could probably print them more cheaply, too. Both Amazon and Google can move virtually unlimited volumes of bits anywhere on the planet at a fraction of the price Hachette can deliver books to retail.

Amazon is not poised to tell Hachette and other publishers that it will pay a smaller share of $9.99, they are thinking about whether they need publishers at all, especially when it comes to increasing the perceived value of e-books among consumers. Because, Mr. Nourry, e-books will not sell for $9.99 for all time. Just as books sell at different prices based on the size of their markets and the value of the information (a tricky word, but more in a moment) they contain, e-books will sell at a wide range of price points. Amazon is only losing money on e-books today in order to have a larger share of the market when pricing returns to something approximating normal. Today’s pricing in e-books is the least of your problems. Be afraid of Amazon and Google offering to connect authors to the market without you.

The thing is, Amazon does not know how to work directly with authors. Amazon is a retailer and the master of distribution. Writers are a lot messier to deal with than crates of books. Amazon needs publishers to develop authors and authors’ relationships with audiences. Publishers need to stop printing and distributing books on spec, transitioning to a demand-based business model. The one thing publishers can do is create demand—although there is still much to learn about creating demand in conversational markets.

The good news is that publishers have a huge advantage compared to the music labels, which, it turns out, don’t own the venues where much of musical value is created. Why? No one will ever pay to watch an author work as they do to see a band live. Writing is tediously hard work, it’s painful to watch. The only place writing comes to life is on the page—even when read aloud or performed, the words appearing on a page are the source of the primary value. While many people would pay to watch Jimmy Page goofing around on his guitar instead of playing with Led Zeppelin, authors can only create value when writing, reading their writing or talking about their writing. Publishers are still uniquely prepared to help writers connect with readers.

Which brings us back to information. Hardback books are a remarkably formal and expensive package for information. They, more than almost any cultural artifact, can accrue value from simple annotations, such as the signature of an author, numbers denoting a limited edition, and the condition of the cover. As an author, I believe it would be best if readers pay for the books, articles and ideas they read and find valuable in e-book format (whether in cash or attention given to ads—let’s be catholic about revenue models for the sake of argument). I also recognize that extending the ability for an author to connect with readers, say by providing a way to have readers pay for a personalized note that could be tipped in to a hardback edition, is something a publisher could do for me that I would not do myself. There is much more that can be done to make happy readers pay $100 for a special edition and cherish the fact they did. The analogies with musical performance are excellent brainstorming avenues, though customization, the hallmark of the information age, is also very promising. Imagine, for example, selling limited edition covers (just the covers) of a book by renowned artists—the author, the artist and the publisher get a split of a high price-point product. The book is a canvas for myriad examples of creative packaging of information in many forms, not just the words that inform the experience of reading a book.

Since Hachette now has the ability to distribute cheap copies of e-books to build interest in an author or title, it can use e-books to create demand for customized editions based on unique combinations of information at a variety of price points, not to mention to eliminate most returns exposure. I’m not suggesting that giving away books for free is a long-term business strategy, “free” is an excellent short-term promotional strategy.

If a first edition digital book can be free, the whole publishing production model and pricing scale needs to be flipped end-on-end. The hardback should become the final step in a book release, when the highest value can be extracted from the formal and expensive process of making a hard covered book. A simple back-of-the-napkin calculation will show that it is much better to put small amounts of money at risk in many e-book titles, then sell high-margin hardbacks to dedicated readers (and drive paperback sales in physical retail based on local demand), than it is to earn a profit on two or three hardbacks in ten published each year. When alternative pricing models for e-books, such as Mike Shatzkin’s “debut pricing” model and the many enhancements possible with digital books are factored in, it’s plain that the new potential profits in e-books will eventually dwarf today’s hardback business.

Fixating on the hardback business is the path your newspaper peers followed. Don’t make their mistake. Concerns about preserving CD albums among music executives handed Apple the majority of profit in digital music sales—iTunes now accounts for 25 percent of the whole market. Apple doesn’t put any capital at risk to sell a band, the labels do while continuing to grope for a larger share of performance revenue generated by their bands. You still have the opportunity to rethink your business before Amazon or Google trump publishers with marginal improvements in share of revenue for the author.

Giving a distribution partner the opportunity to corner the market in a format for information is the death knell for a publisher. If you kill your hardback profits in order to make sure your books are widely and easily available on any e-reader at a reasonable price, Hachette will be in the most competitive position among major publishers and vis-a-vis Amazon and Google.

Best regards,

The Editor

About Mitch Ratcliffe

Mitch Ratcliffe is a veteran entrepreneur, journalist and business model hacker. He operates this site, which is a collection of the blogs he's published over the years, as well as an archive of his professional publishing record. As always, this is a work in progress. Such is life.
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