I should emphasize from the start of this post that as of this writing there are no signs that Barnes & Noble is close to bankruptcy.
And yet in publishing circles, the prospect of Barnes & Noble going the way of Borders is sort of like a doomsday conversation that is impossible to resist. It’s the rare business lunch that does not at least reference this nightmare scenario.
But what would really happen if Barnes & Noble bit the dust?
I turned to publishing sage Mike Shatzkin, who has been involved in the book business for decades and has advised some of the biggest players in the publishing industry. Mike is currently working on a book about publishing with Robert Riger for Oxford University Press.
Nathan: Barnes & Noble has an uncertain future as a print bookseller, as its revenues decline and it transitions toward diversifying its products toward games and toys. It didn’t take long for B&N to go from being the bad guy in You’ve Got Mail to the equivalent of the little shop on the corner everyone is rooting for. What impact is this going to have on publishers?
Mike: These three sentences open up a world of things for publishers to be thinking about.
There are two big shifts taking place in the book business that are not favorable for Barnes & Noble.
1. More and more printed books are being purchased online and fewer and fewer are being purchased in stores. The takeaway: sales of books in stores in total are likely going down.
2. More and more book titles are being delivered to the market with motivations other than pure commercial intent and fewer and fewer are being delivered by publishers trying to make a profit from publishing books. The takeaway: sales of books issued by those not overtly trying to profit will steal markets and mindshare and reduce margins for the publishers trying to run businesses.
The movement away from brick-and-mortar stores is an obvious challenge for B&N, but the weakening of commercial publishing is too. Non-commercial publishers — authors or entities that do books as an ancillary activity — will not take the financial risks necessary to put books on bookstore shelves. And the very real risks involved in putting books on store shelves are going to be on the minds of the publishers whenever adverse news about B&N’s financial health surfaces.
But the big publishers are only slightly less dependent on Barnes & Noble’s success than B&N’s shareholders themselves. All of the big publishers were built around their ability to “put books on shelves”. That’s what they can do that authors can’t do for themselves and, up until now, Amazon couldn’t do for them either. Although big publishers sell bestsellers that are on mass merchants shelves as well as bookstore shelves, Barnes & Noble remains the one stop for bookstore exposure which handles most of the output of the big publishers. B&N delivers as many retail locations as the indies do and, for the most part, more sales.
What would the landscape look like if B&N exited the book business entirely or, god forbid, went bankrupt?
Without Barnes & Noble, the business models of most of the publishers we know are severely challenged.
Although publishers would almost certainly have some warning about either a bankruptcy or an exit from the book business — neither would happen “suddenly” without at least a bit more “gradually” than we’ve yet seen — the absence of B&N would be a painful blow to the core business model of trade publishing. For about 100 years, the core proposition for mainstream publishers doing fiction and non-fiction for consumers has been “we put books on shelves”. That’s the proposition to the authors, as well as the service to consumers.
Putting books on bookstore shelves requires capital, knowhow, and organization. It is also the one function publishers perform that an author really can’t do for herself. Even the self-published authors who have made a print option available through print-on-demand — and both Amazon and Ingram enable that on what is almost entirely a marginal cost basis — don’t attempt to put speculative inventory on store shelves. The best they do is make their books available through established channels (Ingram) for special order on a customer request.
So were it to happen that the chain that supplies probably about ⅔ of the available shelf space for most titles were to disappear, the business model itself would be broken. The incentive for authors to shift to a self-publishing model, where they get a lot more per copy for ebooks and specially ordered POD books, would strengthen. And it would be pretty compelling in any case where the author brand was powerful or the author did most of the marketing of the book.
So publishers would be hurt at the revenue end and the IP supply end of their chain, which is the entry and the exit.
But the “financial risk” of losing B&N is one thing; there is also the financial risk and cash outlay involved in selling to B&N in the first place, namely that inventory has to be supplied to be paid for well after it is delivered. And return privileges have to be offered that involve taking back unsold books and attendant costs to accepting those returns, among which is — quite often — taking back inventory that will not be resold at full price.
Allowing bookstores and wholesalers to return unsold merchandise is one of the key and standard features of most publishers’ trading terms. It is so ingrained in the trade that booksellers would order without it only in extremely exceptional circumstances. For most books, it would be a non-starter for a store to take a book they couldn’t return if it didn’t sell.
The financial risk associated with returns is the main reason that indie authors don’t even attempt to get their books into bookstores. And it will suddenly be very much on publishers’ minds if B&N looks like it is hitting the financial rocks.
Were a bankruptcy to occur, the stock in B&N, even the books that were not yet paid for, would be owned by the company in receivership and the the amounts owed to the publishers would be in a queue for payment along with what is owed to other creditors. (NB note: When Borders went bankrupt it owed $41.1 million to Penguin alone).
If that happens with an individual store or small chain, the publishers’ response is fairly clear: stop shipping without prepayment or, at least, very tightly restrict credit. But if that were to happen with their one existential brick-and-mortar account, the course wouldn’t be as obvious. Because a world without B&N is a very scary world for publishers and it would actually be “prudent” to take risks to prevent their demise if a publisher could.
So, yes, publishers are rooting for B&N today the way they rooted for the little shop on the corner against B&N two and three decades ago. But there was little publishers could do to save struggling indies when the chains were undergoing their Wall Street-fueled store expansion and there may not be much publishers will be able to do to help B&N overcome the combination of a changing retail marketplace and the chain’s own supertanker-like inability to conduct experiments and change its business model.
Assuming publishers were able to weather the initial financial shock of a B&N bankruptcy, how would they have to adapt in order to survive? Will it be viable to sustain all of the expenses associated with distribution of physical books (printing, warehousing, shipping, sales teams, etc.) in a world without B&N?
The major publishers would almost certainly weather the financial shock of a B&N bankruptcy; it wouldn’t bankrupt them. Some smaller publishers would undoubtedly be crippled severely and be unable to function. They would just become consolidated into larger ones.
How disruptive this would be to the overall business model would depend on the shape of the rest of the trade when it happened. As we sit here today, B&N might be 12-15% of the overall business for trade publishers. Big Five publishers sell a lot of their bestsellers in outlets that are not important for secondary publishers, like mass merchants. Various specialty book publishers might have outlets in museum shops or other specialty retailers like garden centers that reduce their dependence on B&N. Genre fiction — romance and sci-fi — sell disproportionate numbers of ebooks, so they are less dependent on B&N. But smaller general trade publishers without the ability to tap special markets have a higher reliance on B&N and would be hurt worst.
However, B&N’s share of the business keeps declining. They are losing share to Amazon and to independent general bookstores consistently. And bankruptcy for them is certainly not imminent. So the chances are that when the day comes that they go bankrupt, they’ll be 10% or less of most publishers’ business.
Where publishers will lose, badly, is in their ability to launch general trade books with any kind of substantial publication day laydown, or availability of books to the public in stores. The 500-800 indies don’t buy in any coordinated fashion. Big publishers can hit them all and persuade most, but smaller publishers really only get assured pub date distribution through B&N.
So what that means is that we’ll continue to see what we’ve seen for 20 years. The books at the top will sell an increasingly disproportionate number. What publishers have always called “midlist” — books that sell 5,000 to 50,000 copies — will lose share and become less attractive publishing propositions. There will be fewer of them launched.
The joker in the deck is definitely Amazon. Amazon has shown as much appetite for opening new retail locations as B&N has shown the risk of losing them. If Amazon has a handful of locations, like they do now, B&N going under won’t change much for them except to add substantially to their existing online retailing business. But if Amazon had 1000 locations when B&N disappeared — and that is a decent bet for anytime more than 2 or 3 years from now — then they could get a stranglehold on the commercial book business. That could mean buying a major house would make sense for them, or competing for titles that they would never go after now would become a reasonable proposition for their publishing arm.
I want to wrap up by thinking toward how all of this impacts authors. While the actual mechanics of self-publishing a book are actually pretty easy, there are two areas where it’s still very difficult for self-published authors to reach readers: at the end of the day, publishers can get print books onto shelves and they can generate reviews and publicity attention that self-published authors struggle to garner.
While there are undoubtedly some impressive self-publishing success stories, there still hasn’t really been a household name defection from traditional publishing to self-publishing, a J.K. Rowling, James Patterson, or Stephen King opting to go independent.
At what point do you think we’ll start to see some of these big authors reconsidering their options, and how much of a threat does this represent to traditional publishers?
Self-publishing currently has the severe limitation of it being just about impossible to put books on bookstore shelves. In this day and age, anybody can get themselves a sales force to solicit orders for books, but somebody has to take a substantial inventory risk for store placement. You have to print copies in advance, wait for payment, and subsidize the cost of processing returns as well as issuing the credits for them and most likely eating the inventory. That still requires a publisher.
But the world continues to change. It isn’t hard to imagine that five years from now, Amazon will be the biggest bookseller in the physical world as well as the online world. The inventory risk to them is minimized by the fact that bookstore shelves are also warehouse shelves; they can supply a book in response to an online order from any shelf on which they placed it. So the “risk” of putting books on those shelves is not as great for them as it is for everybody else.
So if we get to a world where Amazon sells more than half of the bookstore books, or any substantial percentage of them, we could also see a rewriting of the commercial rules. Right now, the retailer takes a (temporary) risk equal to the wholesale price of the book and the publisher takes a risk equal to the cost of printing the book plus the cost of shipping it out and receiving it back. It wouldn’t be crazy for Amazon to say “pay the cost of PRINTING this book and we’ll put it on our shelves and (effectively) refund that cost of we sell it.”
One of the most surprising aspects of the self-publishing revolution to me (so far) is how little attraction it has held for the biggest authors. The defection rate of authors the publishers really want to keep is trivial, although it might be true that publishers are paying more to keep them than they’d like or that they would have without the threat that they could self-publish.
Of course, as more and more of the business goes to Amazon it gets easier and easier for them to deliver a proposition that provides as much revenue to an author for being exclusive to them as the author could get with a publisher sharing the revenue to get them more ubiquity and more sales.
Art: William Joy – A Lugger Driving Ashore in a Gale