In The Beginning There Was The Word

Beech Bark

The word ‘book’ comes from the German ‘buch‘ meaning simply an item with words fixed on it. It shares the word for ‘beech’ tree because healthy beech bark is remarkably smooth and light gray, whereas marks carved into the living bark of beech trees would first turn black and then grow with the bark, preserving carved words “forever.”

Actual books were first made by monks, who dedicated their lives to collecting and preserving the knowledge of the world. These books were made by hand, often taking years as pages were meticulously arranged and often decorated. The finished books were protected by the monks, and available for reading by a select few clergy, for literacy was necessary only for religion and the government. Rich folks hired people to read for them. Beyond the monks’ libraries and government archives, knowledge transfer was strictly oral.

Those who controlled books controlled power (religion and government). The extraordinary cost (in labor and time) of creating a single book meant that only the wealthy could afford to make them and keep them.

Then some clever people (first in China, then in Germany) figured out an easier way to reproduce words, and books, using moveable type, and suddenly books were cheap and it was worth the time and trouble to become literate because books were popping up all over. It’s no coincidence that the release and consumption of ideas using printing presses (Guttenberg Bible published in 1455) came in the early states of the “Renaissance” cultural revolutions across Europe.

Even these first mass produced books were constructed like the books the monks built sheets of paper were folded and nested to create small “folios” of writing. Groups of folios were sewn together into a “binding” and then covered with a stiff protective material. They were “hardcover” books. However, unbound folios of printed paper became “pamphlets” which became what we now call “paperbacks:” inexpensively constructed books that were not meant to last centuries, but were meant to “get the word out” fast.

And there our book technology paused…for 500 years. Consortiums of book makers developed, specializing in distributing folios (newspapers, magazines, pamplets) for regular consumption, or in distributing books for public and private libraries.

Then some clever people figured out how to transfer and capture information in binary form, primarily as electric current, made possible by a “transform resistor” or “transistor.” As engineers improved the manufacture of multiple transistors made of semiconducting materials, more information could be transferred and then processed faster than ever.

At first this engineering allowed printers (of all kind) to finally abandon casting and using raised metal chunks to embed ink on wood pulp paper (including type writers and dot-matrix printers). But the digital information still needed to be output on paper to be transferred most effectively until some clever people figured out how to send this digital information over the copper wires that we had been using for 100 years to talk across distances, first to small groups called “electronic bulletin boards” and then to academic world that was already linked together in an Internet.

That was where we were in 1995: a literate society using a mature paper distribution model challenged by a completely different but much more efficient mode of transferring ideas.

NINETEEN NINETY FIVE

Why is 1995 an important date? Because every digital tool we use today existed, even if only in a primitive form (mobile phones) and has only been improved since then. Everything that was created after 1995 was created using these same tools. And 1995 is also when a clever person decided that he would use the new information system to vastly improve the way everything (ideas and items) were transferred from generator to consumer. He called this new company Amazon.com and he started by selling ink on wood pulp and delivering a vast inventory of it to your home for less money than you normally paid at what had been up to 1995 the only option for buying books.

Therefore the book industry was put on notice almost twenty years ago: the world is now digital — innovate or die. It’s notable that instead of immediately innovating using these new digital tools the colossus of book selling at the time, Barnes and Noble, chose to sue Amazon.com over their self-proclaimed title of “the world’s largest bookstore.” Needless to say Amazon.com never had to stop using that trademark, but Barnes and Noble is no longer a colossus of book selling.

In 1995 I had just spent a few years in the publishing business, first as office manager, and then as marketing manager for Tilbury House Publishing in Gardiner, Maine. I had been to the American Book Association annual conference in 1992, and I worked with someone who had spent a good deal of time at Little, Brown publishers in Boston, one of the distinguished old houses of publishing in American. He loved to describe the workday at Little, Brown in his time (the 1980s): wander into the office with a wad of the morning’s newspapers under your arm; read said newspapers front to back; after an 11am coffee break, make and/or return a few phone calls until noon when you would decamp to your favorite downtown restaurant. If you arranged to meet an author, or a business associate, the lunch would be paid for by Little, Brown. Three or so martinis and a meat-heavy lunch later you made your way back to the office, hopefully before 2pm, at which point you made a few phone calls, wrote up a memo to be sent to the typing pool, and/or met with a colleague or two to discuss where tickets could be found for the upcoming Harvard v. Yale football game, and whether a date for the game was necessary or to be avoided. Desks began to empty at 4:30pm, and if you were working after 5pm you might get a suspicious look from your boss who would be concerned that you were using company resources on a private project. It’s safe to say that the publisher of Evelyn Waugh, Lillian Hellman, Norman Mailer, Henry Kissinger, and David Sedaris worked much like every other publisher in the world at that time.

I also learned quite a bit about the book selling business by talking to the shops that ordered direct from Tilbury House, as well as by reading the trade publications. The most amazing thing I learned in the early 1990s is that when a publisher sells a book to a bookstore they don’t actually sell it. Unless there is an implicit agreement between publisher/distributer and the bookstore that the sale was final (very unusual), all books on a book store’s shelves are on consignment. Unless they are damaged they can be returned to the publisher for a FULL REFUND. Back in the 1990s books were sold (or consigned) by publishers to bookstores at around 50% of the retail price of that book. Therefore a well run bookstore’s profit margin on sales was almost 100%. This is not unusual in the retail world, and naturally there are lots of other costs to running a brick-and-mortar bookstore, but this margin is what allows many bookstores to discount best-sellers at 10% or 20%, especially since they can usually buy larger numbers of those books for less than 50% of the jacket price.

Opening a bookstore then was very much like buying a building and renting space: you spent money to get in business, and you stayed in business by selling that space at the market price, and if you ever had to get out of business you either sold the entire bookstore (business plus inventory) or sold the inventory to recoup your initial investment. All the risk was in location and competition.

It was even better in 1995 for publishers; here is a simplistic overview of a publisher’s business model:

–Pay an established author an advance (let’s say $10,000) to write a novel that will retail in hardcover for $20;
–Write a contract that pays the author 10% of the retail price of the first 5,000 books sold, then 15% of all books sold after that (quite standard back then, though 15% was a top rate);
–Pay editors and assistants to move the book from concept to printing job (price varies on the complexity of the book and the number of books an editor’s office handles — let’s assume the overall cost is $5000 for this one book);
–Pay for promoting the book with a sales staff
–Pay $15,000 to print 10,000 books and ship them to warehouses for distribution;

Total cost so far: $30,000.

Promotion costs are variable — often non-existant in the case of new authors besides sending “gallies” to book reviewers around the country — maybe $5000 for a book like this to cover the cost of printing the gallies, the postage to send them, and the share of the cost of sales force who offer the book to stores and libraries by hand. Advertising is fairly limited, even for big authors, who might get few ads in Publishers Weekly in advance of publication, followed by an ad or two in the NYTimes Book Review when it hits the stores, possibly followed up with a few regional ads. But most books do not get ads. Book tours, again, would be for established authors of best sellers, and the expectation would be that the sales generated at readings would cover the cost of the tour.

After 5000 books have sold that’s (roughly) $50,000 of income, netting $15,000 to the bottom line because all $10,000 of the author’s royalties due go to pay back the advance on royalties.

After another 3000 books are sold resulting in $30,000 of gross income to the publisher, but now the publisher sets aside 20% of royalties due ($3800 on $19,000 royalties generated) to protect against bookstore returns, so instead of paying $9000 to the author, the publisher pays only $5,200 to the author, so $21,000 goes to the bottom line of the balance sheet and the $5,200 reserve against return is put into an interest bearing account of the publishers.

So in this idealized (but realistic) example, within a year of an investment of around $35,000, the publisher nets over 100% gross margin selling 8000 hard cover books. When you consider how many libraries there are in the US (121,785 according to the American Library Association) a publisher of an “established author” had built-in sales of at least 5,000 books, so you’re really selling 3000 more than that to make your 100% return on investment. That is pretty sweet. No wonder they could pay everything it costs for your workforce to regularly enjoy three martini lunches.

I worked at a tiny niche publisher, and we worked with press runs of about 5000 books which is what we could safely sell and store. For a huge publisher, selling 10,000 books is not a stretch.

Obviously there are hits and misses in publishing — a new author might have sold only 2000 books, in which case the publisher loses $10,000. But what I’ve described above is not a best seller. If they sell out of the print run they make $24,000 additional gross (which pays for two misses). After that the publisher grosses $5.50 on every book sold (after $3 in royalties and $1.50 in printing costs). That’s $5.50 in free money as long as the book remains “in-print.” Another 10,000 books brings in $55,000. A best seller in the hundreds of thousands of copies? Now you’re starting to justify the million dollar advances thrown at authors who can sell that many books. Because, remember, their margin was built in: on a $20 retail book, they will ALWAYS gross $5.50, and the advance is paid from future royalties. So selling 100,000 books after giving a $10,000 advance or a $500,000 advance still gives the publisher $550,000 of gross income — given the same royalty percentage, both authors end up receiving the same amount of money. The only time the publisher loses is when the sales can’t earn out the royalty…but that’s their only risk with an “established” author, and established authors (or newsy authors) are the only ones who get the big royalties.

Can you blame publishers for wanting nothing to change after 1995? Can you blame book stores for fighting tooth and nail to keep the right to return books? Both ideas were lynchpins to successful business models before 1995, models that had reduced risk and high returns built into them. But business plans are supposed to change as businesses naturally change. Change is hard, and it’s especially hard when your business model hasn’t changed in over a hundred years. But that doesn’t mean that external forces that impose change on your business model are “evil” just because they’re making it harder for you to stay in business. Blacksmith shops were a noble local business in America once, also.

But most significant is the first bit in the publishing business model: it cost about $30,000 in 1995 to “publish” a book. And that’s at an established office with salaried professional editorial staffs working on multiple books a year. Small publishers can cut costs on production (paperback only, no advance, fewer copies in the first run) but their staff costs will be higher, so $30,000 might still be the minimal investment required to put a book in print in 1995.

In 1995 blogging on the Internet was in its infancy, known before 1999 as a “Web Log” it was primarily practiced by students, writers, and academics, as a way to share items that would not normally have a home among the work they were paid to do. But the concept is pure publishing, going back to pamphlets hopping off a Guttenberg machine in 1460, only with the cost of distributing your words to hundreds of millions of potential readers near zero. Even if you add the entire cost of a computer, Internet connection, and web server hosting (and in 1995 most bloggers used equipment and connections that already existed and someone else paid for), you might spend $2000 to be able to self-publish to a potential audience magnitudes larger than a book publisher would ever contemplate.

Ah ha! You shout and now shake your fist at the screen displaying my words and ideas. “A blog is NOT a book!” Well, yes and no. A blog might be better compared to a newspaper column, but I’d rather not get into the economics of newspapers(!?) for the sake of this essay. Plus many columnists compiled their favorite columns in book form periodically (Erma Bombeck anyone?). The point is that before 1995 books brought ideas to thinkers, and in 1995 that required someone with $30,000 and the publishing apparatus at their disposal to decide that the ideas merited the investment. After 1995 ideas can be communicated to thinkers around the world instantaneously for almost free.

“But I *want* someone to tell me what ideas are important!” you might say because you don’t have time to read through the flurry of chaff in the World Wide Webernets. Well, that’s your prerogative, and we’ve arrived at the true role of a publisher after 1995 — it’s editorial and marketing. Without control of production any longer, can publishers justify their healthy margins based on editorial and marketing services alone?

Back when music leaped from vinyl to CDs, the music business made a HUGE windfall by raising the price of an album (superior product!) while their production/shipping/warehouse costs fell. They got greedy and lazy and when MP3s arrived they ignored it until it was too late.

In my opinion publishers saw eBooks as the new CD: cheaper cost per book (remove HALF your up-front cost and ALL your storage and shipping costs!) and potentially increase the gross margin per unit. With dollar signs in their eyes publishers clung to their pre-1995 business models and those wonderful pre-1995 returns, most publishers have spun their wheels instead of innovating new and better ways to bring ideas to people. That has been left to other people, who have been only too happy to eat their (no longer three martini) lunch. Publishers can shake their fist at these interlopers, and claim that they are “destroying” what the publishers have built over the last 500 years, but really the only thing that is being destroyed is their business model, and that went up in a cloud of dust in 1995.

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