Denial is Bigger than Amazon

Talk to a book author, publisher, or retailer about the future of their business and the denials begin. “Never before have there been so many good books to read”. “Books are the backbone of civilization”. “Life without books is unimaginable”. As a cultural argument, this may be true, but as an economic one, this is a view only of the supply side.

A few key measures give you the vital signs on most industries. If the publishing business applies these honestly, they can figure out where they are really threatened and where not.

Sales. Not every industry with declining sales is in trouble, but most are. According to BookScan, adult nonfiction print unit book sales peaked in 2007 and have declined each year since. Retail bookstore sales peaked the same year and have also fallen each year according to the U.S. Census Bureau. I sold an online book business I had started at about that time for a simple reason: I couldn’t figure out how to keep growing it. Book sales about 6% from 2010-2011, according to the Association of American Publishers. Combined print and e-book sales of adult trade books fell by 14 million units in 2010, according to the Book Industry Study Group.

Unit economics. True, you can make good money in shrinking industries. You may sell fewer items, but make more on each item you sell. So long as you add more value than cost, customers will happily pay you for your product, even in a shrinking market. So what is happening to the unit economics of books?

Start with prices. Book prices have gone up every year for more than ten years – a good sign, right? Not necessarily, because the number of books sold continues to shrink as noted above. But the number of books published is exploding. Bowker reports that over three million books were published in the U.S. in 2010. 316,480 of these were new traditional titles – meaning that publishers introduce 867 new books every day.

But that is the traditional tip of the publishing iceberg: 90%, or more than 2.7 million, books published were “non-traditional” titles in 2010. These are mainly self-published books, reprints of books in the public domain, and resurrected out of print books. This category will explode with titles since the cost of publishing digitally is effectively zero.

These publications vary enormously. Some become best selling light porn for housewives. Others are spam created by software that can pirate an existing title in a few hours (one professor wrote a program that has produced 800,000 specialized “books” for sale on Amazon). Others are highly specialized books not attractive to a publisher. When Baker and Taylor reports that book prices are going up, they are describing traditional, not “non-traditional” publishing.

The cost of bringing a traditional book to market is high and largely fixed, so the declining unit sales of the average book is a huge problem. According to BookScan, the best count we have, Americans only bought 263 million adult nonfiction books 2011, meaning that the average U.S. nonfiction book now sells fewer than 250 copies per year (collectors of first editions take note: it is second editions that turn out to be rare!) Only a few titles become big sellers. In a randomized analysis of 1,000 business books released in 2009, only 62 sold more than 5,000 copies, according to the New York Times.

For publishers, this means that accurate curation (selecting and developing titles) actually has more value to consumers, not less. It also means however, that the risk on any single title is higher, publisher advances need to shrink, and that publishers risk losing power to a handful of successful authors whose fame enables them to set terms. Overall, this is still an industry that is shrinking and being divided among many more products and players, few of which can make money. Not a good sign.

Marketing and distribution. Well, maybe better marketing and more rational distribution can target new customers and grow demand while reducing costs. It happens in hard goods and industrial businesses all the time. Can we fix the book market?

Investments in marketing are very tough to justify. A publisher needs to acquire the book (pay an advance to the author), then develop (edit) it, design, name, print, launch, distribute, warehouse, sell, and handle returns (about a quarter of all books flow backwards from retailer to distributor or publisher — a huge cost avoided by eBooks). After all of this, the average conventional book generates only $50,000 to $200,000 in sales, which radically limits how much publishers can invest in marketing. Increasingly, publishers operate like venture capitalists, putting small amounts of money to work to see what catches on and justifies additional investment. Only proven (or outrageous) authors attract large marketing budgets.

Increasingly, book marketing is done by authors, not publishers. Publishers need to select authors who have built substantial followings, especially online. With too much to read, we read what our friends advise (women especially read with their friends). Publishers are intensely interested in what reading groups choose to read in an era where there is no general audience for nonfiction and fiction is highly segmented. Some products catch on and a few become blockbusters — even some books that begin as unconventional titles without publishers.

So marketing is tough to fix — how about distribution?

It’s a disaster. Retail is hopeless: your chances of finding any given book in a bookstore are less than 1%. For example, there are about 250,000 business titles in print. A small bookstore can carry 100 of these titles; a superstore perhaps 1,500. Stores are for best-sellers – if there are any. Online can carry every title, but really, who needs 250,000 business books? Online selling solves this problem, but enjoys such massive returns to scale that concentration is unavoidable. In the latest count, Amazon had a 27% share of all book sales (including, I estimate, about two thirds of all eBook sales — meaning that they monopolize the only part of the book business that is growing). There are very few reasons that this concentration will not increase.

Underlying demand. OK, fine — the industry is broken. But music was busted too: retailers evaporated, product proliferated and went digital, the label’s value-added shrank, and piracy was a much bigger issue than in books. And despite it all, music is making a comeback: sales are up if you count concerts and ring tones. A few people make a living at it and a few become stars. Is this the future of books?

It doesn’t look that way for reasons articulated by Steve Jobs: although people still listen to music, many people have simply stopped reading books. Speaking about the Amazon Kindle, he argued:

“It doesn’t matter how good or bad the product is. The fact is, people don’t read anymore. Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

Ouch. Setting aside Jobs known tendency to dismiss technologies that he later pursues, is demand for books actually dropping? Are we even reading the books we buy?

The evidence is overwhelming that we read fewer books than we used to. As summarized nicely in the New Yorker, the National Endowment for the Arts has since 1982 teamed with the Census Bureau to survey thousands of Americans about our reading. When they began, 57% of Americans surveyed claimed to have read a work of creative literature (poems, plays, narrative fiction) in the previous twelve months. The share fell to 54% in 1992, and to 47% 2002. Whether you look at men or women, kids, teenagers, young adults or the middle-aged, we all read less literature, and far fewer books.

This is not a small problem, nor is it confined to the book business. The N.E.A. found that active book readers are more likely to play sports, exercise, visit art museums, attend theater, paint, go to music events, take photographs, volunteer, and vote. Neurologists have demonstrated that the book habit builds a wide range of cognitive abilities. Reading grows powerful and important neural pathways that not only make reading easier as we do more of it, but enable us to analyze, comprehend, and connect information.

But for the first time in human history, people all over the world are reading fewer books than they used to. Faced with compelling media alternatives, humans are abandoning the book. We read, but we are losing the habit of reading deeply. Having conquered illiteracy, we are now threatened by aliteracy. Reviving the book industry is only possible if we can revive the book itself.