Why The Digital Revolution Threatens Large Publishers

I think I’ve made a robust case for a digital future, but I’m less sure I’ve convincingly explained why the digital revolution threatens large publishers.

In Thursday’s post, we looked at the recent BookStats survey of the American publishing industry. Some are touting its results as evidence that publishing is in rude health.

I argued that the report only covers the very beginning of the e-book explosion that began late last year which has radically changed the marketplace, and which will adversely affect the fortunes of the larger publishers.

That sparked a vigorous discussion in the comments, and one person (correctly) pointed out that lots of those big-selling e-books are being sold by the large publishers, that they have huge backlists which they are only beginning to digitize, and that their production costs are lower in a digital world too.

All fair points. The bestseller charts are dominated by expensive books from large publishers. And they get 52.5% of that high price they set; they’re not scraping by on 99c e-books. They’re making money. Lots of money.

Kathryn Stockett recently became the latest writer (along with Janet Evanovich) to enter the Kindle Million Club, solely on the back of her debut novel, The Help. That Kindle e-book, priced at $9.99, brought in around $5m for her publisher in the last couple of years. That’s just one sales channel in one of the digital formats. That’s just one book.

Each of the large publishers has a small army of writers bringing in lots of money. And the ongoing costs to sell these books are quite low. This isn’t a new development either. So why should they fear the digital revolution? These are just some of the reasons.

Self-publishing

The paltry digital royalties offered by large publishers will become even more of a hot-button issue as more and more readers switch to e-books – which they will do this Christmas, in their droves.

With each bookstore closure, with each customer that moves online or switches to e-books, the competitive advantage that large publishers enjoy because of their stranglehold on the print distribution network erodes.

It’s a fairer fight online, where self-publishers can match their digital reach, and undercut them on price. Right now, self-publishers are gambling that they can offset the huge loss in potential print sales with vastly increased royalty rates on e-books.

Let’s look at some numbers.

Authors with large publishers normally receive 25% net on digital sales. The real figure, after the retailer’s cut is 17.5%. After the agent takes a bite, that’s down to 14.9%. For a $9.99 e-book, the writer is going to see less than $1.50 a copy.

For a $2.99 e-book, a self-publisher gets over $2 a copy. For a $4.99 e-book, that’s around $3.50 a copy.

As the digital revolution converts more readers to e-books, and opens up new markets internationally, this huge difference in digital royalty rates will lead many more writers to go it alone.

Right now, self-publishers are capturing around a quarter of the top spots in the Kindle Store, and those numbers should increase as more promising writers pull their manuscripts from slush piles, and more experienced writers decide to self-publish.

But it’s not just self-publishers. Many e-publishers and small publishers have very equitable royalty rates. Some are posting phenomenal sales numbers. As that continues, we will see more bankable stalwarts like Joe Haldeman signing with new, progressive publishers like Ridan.

The only way I can see larger publishers stemming the flow is by increasing royalty rates – which they seem loathe to do as it would dramatically affect their profitability.

Marketing

Large publishers are geared towards marketing to their customers: bookstores. Selling to readers is a completely different game, requiring expertise in leveraging social media that publishers simply don’t have.

For several years, the burden of promotion has been shifting to the author – it’s no longer acceptable to hand in the finished manuscript and expect the publisher to do the rest.

I think it’s fair to say that self-publishing attracts writers of a more entrepreneurial mindset. The flip-side of that is that those that remain in the traditional system may have a less entrepreneurial mindset.

I don’t mean this as a sleight, and I’m a little hesitant making this generalization, but I don’t think it’s too much of a stretch to say that the average self-publisher is more comfortable with the promotional aspect of publishing.

In addition, small publishers like Angry Robot, Samhain, and Ellora’s Cave have demonstrated a remarkable aptitude for connecting with readers through social media.

As more of the market moves online and to e-books, the importance of social media skills to selling books will become even more crucial. Large publishers (and their writers) will be up against a horde of smaller, hungrier, and more nimble competitors, whose writers will have the extra motivation of knowing that each sale earns them more money.

If you are paying someone twice as much per sale, they are going to work the room a little harder.

Amazon

The digital revolution is killing bookstores, and many of those that remain are downsizing their book displays. Amazon is hoovering up virtually all of the readers that shift to buying print books online, and well over half of those that switch to digital.

But Amazon doesn’t just threaten their grip on the print distribution network, it is also shaping up to be a major competitor on their home turf: publishing. Each dollar Amazon earns funds more of their aggressive expansion plans, including signing up a host of successful self-publishers to make a run on the bestseller lists.

And where the large publishers are weak (marketing), Amazon are very, very strong. They have millions and millions of email addresses. They know what those readers buy, how often they buy it, and if they ever read it. They know how likely a reader is to buy any given book, if displayed it while browsing. They can shift books like no-one else.

Writers who have signed to their imprints won’t just enjoy extremely favorable royalty rates (over triple what the large publishers are offering), an advance, an author-friendly contract, a digital version that is released when ready, and a print publication time that is unusually fast, they will also benefit from an unprecedented, targeted, digital marketing push.

The Future

Perhaps these are all areas which the large publishers could address. I often hear people say that it takes a long time for a big ship to turn around. However, what I’m seeing is a ship still heading in the wrong direction.

Large publishers are focusing on the wrong issues. They seem obsessed with piracy when their time, attention, and resources would really be better spent elsewhere.

In the UK, for example, the large publishers expended all of their political capital on the hopeless Digital Economy Act, enabling them to sue readers who have pirated books. They really would have been better off focusing on abolishing the crippling 20% VAT rate on e-books.

Amazon must apply the Luxembourg VAT rate of 15% to all sales in the EU, regardless of what country the consumer is actually in. Abolishing the VAT rate in the UK would have allowed them to undercut Amazon by 15% and sell through their own e-bookstores.

But they seem to have little interest in developing their own e-stores at all. I mean, most of them have an online store of some description, but they are clunky, the prices are way too high, and they don’t seem to really promote them. Most importantly, they haven’t captured any significant market share, and I don’t see that changing any time soon.

The decision not to compete in the retail sphere, the paltry rates they pay their writers, their inability to market direct to readers, and the continuing strengthening of Amazon is why I think the digital revolution poses a severe threat to the financial future of the large publishers.

What do you think? Will they turn it around?

David Gaughran

Born in Ireland, he now lives in a little fishing village in Portugal, although this hasn’t increased the time spent outside. He writes novels under another name, has helped thousands of authors build a readership with his books, blogs, workshops, and courses, and has created marketing campaigns for some of the biggest self-publishers on the planet. Friend to all dogs.