What is the value of publishing?

Disruption is a word thrown around business school campuses with abandon – the ability to disintermediate established business models in favor of a less costly or more efficient new model, oftentimes leveraging technology in place of more-costly physical or human infrastructure (considering I’m ¼ through business school, you be the judge of whether I’ve wasted the $50,000 spent so far.)

Given my background in the book publishing industry, and the relative disinterest I’ve experienced from MBA recruiters, I continue to spend a lot of time thinking about the publishing industry (in books and increasingly video games), and opportunities for potential disruption or innovation in one of the world’s oldest businesses. 

While some may decry books’ antiquated ‘delivery’ method and are familiar with the annual obituary to reading and our attention spans, books have proven remarkably resilient, continuing to serve a massive place in the national and international news cycle and imagination, while maintaining a perception of high value ($30+ hardcover, $15+ paperback) in a world where:

  1. Local newspapers continue to fail
  2. Movie theaters have stopped their inexorable rise in prices
  3. Music has undergone a profound (though stabilizing) shift
  4. Podcasts have struggled to find a business model

Inspired by several recent conversations, the thought-provoking podcast by A16Z on the future of readers, writers, and creators, and Anne Trubek’s excellent Notes from a Small Press newsletter, I thought I would type up my thoughts on the value of book publishers, and try and explain why writers choose to work with publishers.

For simplicity’s sake, I will mostly speak to the benefits to writers, though these benefits are often symbiotic:

Audience

Publishers provide authors with an audience for their ideas and stories to be shared with the world. 

While exposure can be developed over time online via Twitter, Instagram, blogs, etc., most writers view writing as their full-time job, as opposed to strategizing, cultivating, and maintaining a social media presence and audience. 

Recently, this has begun to cut the other way: having an established audience / social media presence (xx followers) becomes an asset when pitching your book to agents / publishers: it provides a ‘floor’ of potential book buyers and preorders (as opposed to starting with 0, in the case of a previously ‘unknown’ author). Ultimately, this means less effort and creativity required for the marketing and publicity group of the publisher, who are contending with increasingly smaller book coverage and limited attention spans.

Expertise, or Comparative Advantage

Along these lines, working with a publisher allows the writer to focus on developing the best content possible, while the publisher is able to leverage its developed expertise in all of the non-writing aspects of books.

On a publishers’ payroll is an army (sometimes a squadron or squad) of folks dedicated to the success your book, including (but not limited to):

  • Editing (in many cases a hugely effort-intensive exercise)
  • Art and design (covers, photos, fonts, etc.)
  • Production (all the details to get a book print- or e-reader-ready)
  • Printing 
  • Sales (getting your book into the major bookstores, indies, and online)
  • Distribution (ensuring that your book stays in the major book stores, indies, and online)
  • Marketing & Publicity (organizing publicity / book tours, sending out to authors / influencers, scheduling interviews and media coverage, etc.)
  • Royalties (making sure you get paid)
  • Etc., etc.

While it is possible to either do all of the above yourself, or outsource portions of it to freelancers (out of your own pocket), working with a publisher reflects a writer’s trust in the publisher’s ability to take a manuscript or idea and turn it into a book.

Capital

Most writers have day jobs to supplement their income, reflecting the reality that most writers do not make money from their talent and passion for writing. Even authors talented enough to enter our contemporary ‘canon’ oftentimes toiled in day jobs to subsidize their desire to write.

However, writers are fortunate enough to sell a book to a publisher will receive an ‘advance’ payment prior to the publication of their book. While the size of this advance can vary dramatically (see my post Publishing as Venture Capital for more here), and is normally received in portions (normally either ⅓ at signing, ⅓ at submission, and ⅓ at publication, or ¼ including a paperback release), a book advance oftentimes represents funds that the author will use as subsistence in the years that they spend writing, researching, re-writing, fact checking, etc. their books. 

In the realm of self-publishing and at (some) smaller presses, an advance is normally eschewed in favor of a flat royalty payment of each copy sold at publication. While some would argue that this scheme allows for much more creative control (I recently heard from a game developer that “the longer you wait to get money, the more creative control you have”), an advance-based system minimizes the risk borne by the author. 

Just to expand on this a bit, imagine that a writer receives a $100,000 advance on a book proposal they’ve submitted, with a ⅓ payout scheme. Upon signing the contract, the author will receive a check for $33,000-after-taxes prior to having submitted or publishing a word, with no give-backs (except in extreme circumstances publishers never request advance $ back). While the reality is that this amount, especially split across several years prior to submission, represents an extremely low-income salary in the US, the alternative must be considered as well: receiving $0 prior to publication, self-financing the entirety of your book project (read: editing, art, production, distribution, publicity, etc.), and then hoping that the royalties received by copies sold will collectively make up the $100,000 advance plus value-added costs borne by a publisher.

Using back-of-envelope and generous numbers, a $20 physical book with a 55% royalty (assuming a 60% royalty [the amount the author keeps] less 5% cost of production [generous], and no distribution fees), an author will need to sell approximately 9,000 copies of their book just to reach the $100,000 advance level above. Assuming the average internet user has ~650 social ties, and they all buy a copy of your book, this still means selling your book to 8,350 strangers. Whether this sounds daunting to you or not is probably a good bellwether of whether you need a publisher!

Keep in mind that the advance paid by a publisher is an estimate of the amount of copies that the editor/publisher believes you’re able to sell, rather than free money. But rather than having to sell books out of the back of your car, or shill your book online or at talks, there’s a well-oiled book distribution system already in-place to support you through this process.

As previously mentioned, a previously established audience or track record may be able to circumvent the traditional publishing process through the process of crowdfunding, but again, this requires a significant number of people (depending on average donation size) giving you money 1-2-3 years before they see any physical (or digital) product in exchange for their hard-earned dollars. 

Credibility

For an author seeking to demonstrate their expertise in a subject, there is still no better artifact than a book to demonstrate one’s competence, and monetize their research and original findings or point-of-view. 

Within the writer community (especially in fiction), a publishing deal with a reputable publisher also acts as a signalling mechanism–this person should be taken seriously as an author. While there are earlier gatekeepers such as MFAs (see here a fascinating argument on the tradeoffs seen between diversity and the mainstream MFA path-to-publishing) and book agents that serve as earlier hurdles, in many circles a published book (or books) allows one to justify calling themselves an ‘author’ or ‘writer’ in a professional bio or resume, rather than someone who writes.

Books oftentimes allow authors to leverage their developed domain expertise into further employment opportunities, such as speaking engagements, professorships, consulting gigs, etc. 

Curation

Similarly on the writer side, in a world where the internet provides us with instant access to infinite information, finding a book written on a topic gives the reader a comprehensive or definitive history of an event or subject. Even the most technologically literate folks out there (save maybe Vitalik Buterin) continue to rely on books to learn and engage with new ideas, and use bookstore browsing as a way to exercise and indulge their curious mind.

While Amazon has managed to take the previously limited shelf space of a bookstore and replace it with a practically unlimited number of books available at the reader’s fingertips, more than 7 out of 10 internet users fail to make it past the 2nd page of search results on an Google query, reflecting our limited desire to consume large amounts of information, and the potential limits of Amazon’s ‘limitless’ bookstore. 

I will continue to expand on this in more depth soon, and delve into the economics behind a book in the traditional publishing industry.

Gravity’s Rainbow: With Less Bluster

The following is a brief collection of thoughts ~50 pages into Thomas Pynchon’s Gravity’s Rainbow, a book I initially set out to read nearly a year ago.

As my time in Brazil begins to come to a close, I’m finding it time to return to old resolutions, goals, and objectives. Given an overabundance of free time and some amount of foolhardy ambition, I figured that now would be as good of a time as any to embark on the challenge of reading Pynchon’s Gravity’s Rainbow, one of several postmodern door stoppers known for its semi-intentional incomprehension and difficulty. Accompanying me for the experience is A Gravity’s Rainbow Companion: Sources and Context’s for Pynchon’s Novel, which has to date been an invaluable companion indeed.

50 pages in, and I have struggled to pick up a rhythm to reading the book and its accompanying companion.

To date, the process has mostly been as follows:

a) visit the companion for an initial overview of the ensuing “episode,” an oftentimes unconnected adventure taken by one of the main characters of the novel to-date

b) note the first reference made by the Companion to a word, phrase, or sentence in the book, and mentally file it away to revisit upon reading

c) dive into the novel itself, with a mind for the episode’s first passage referenced in the Companion

d) Read through the Companion text, annotating the book itself to its context while trying to connect the dots between the novel, the allusions made by the Companion, and my own understanding

e) Read until the culmination of the episode (marked by a line break), and revisit the Companion to restart at step A

Gravity’s Rainbow takes place in WWII England in the area surrounding London, which is in the ongoing process of being bombarded with V-1 and V-2 German missiles. The missiles themselves, and the ongoing risk of falling victim to their seemingly-random fall across London, create a mortal and almost sardonic backdrop to the events taking place and the actions taken out by the main characters.

The protagonists to date are young US and British servicemen working in a Special Operations (known as the SOE), investigating the missiles across greater London.

The first character we are introduced to, Geoffrey “Pirate” Prentice, is endowed with the  superhuman power to intercept and enter the dreams of others. Much of the book’s first 50 pages take place in these very dreams and images, and are reported back to “The Firm” – a secret British military organization charged with managing the “supernatural” and experimental pursuits of the Allied Forces.

Some of the characteristic elements of Pynchon’s writing are evident – the double- and triple-entendre names of his characters, as well as the acronyms of organizations (in this case, both real and imagined), that persist across his writings. Unlike some of Pynchon’s other books that I’ve read (Lot 49, Inherent Vice, Bleeding Edge), the acronyms used so far seem to be a mix of the real and imagined, referencing companies, missions, and organizations of the Allied and Axis WWII forces.

The Companion helpfully peels back the curtain on the at-times inscrutable to reveal some of the meticulous research and preparation taken by Pynchon – his grasp of the London and greater London geography (numerous references to neighborhoods and nearby villages and towns are made), his revisiting of the Times of London daily newspaper for not only the daily wartime current events, but also seemingly asides to epochal shops, shows, and miscellany, and his knowledge of BBC Radio programming. All of the above seek to create a photo-realistic period piece – seeking to mimic the era’s styles, diction, and events.

Of course, given that this is Pynchon, the last thing I expect is a straight backed work of historical fiction, rather the novel’s effect is to blend the real and wildly imaginary into a ridiculously believable hodgepodge of satire-cum-conspiracy characteristic of so many of his other works.

Hopefully the rhythm will pick up and I will have more lucid reflections to come. Regardless, an enjoyable experience, and not quite yet a descent into madness.

Publishing as Venture Capital: A Deep-ish Dive

A well-worn adage from organizational leaders at my company is that “book publishing is the venture capital of the media world.” While cynics or the uninitiated might be prone to roll their eyes at this attempt to draw a connection between the high-flying and innovative world of venture capital investing and the seemingly staid, stagnant, and predominantly print-based publishing industry, the comparison is a lot less farfetched than you’d think.

Inspired by the October 31st Wall Street Journal article These Independent Publishers Are Challenging the Corporate Players (paywalled, sorry), and doubling as this week’s Best Thing I Read This Week, I thought I would flesh out this idea in more detail.

 

Core Idea

Before we go much further, it’s important to explain one of the key concepts that underlies book publishing: the “advance.” The book advance refers to the amount of money paid by a publisher to an author for the rights to publish the half-baked idea / proposal / partially-completed manuscript being pitched by the author. The actual amount accepted as a book advance varies widely, but in every instance is more akin to a bet than a calculation – a wager that a book will perform in line with (or even exceeding) the acquiring editor / publisher’s expectations. The estimate is normally derived from either comparable books by different authors, a previous book by the same author, or on the strength of the proposal, as well as the acquirer’s belief in the future success of the resulting finished product. Of course, competition is often involved in the advance amount, propagated by a literary agent working to sow interest across different publishing houses to create a competitive dynamic (i.e., unnecessary time pressure, preemptive / exclusive offers, etc.) and drive up the price.

The book publishing industry makes thousands of such bets on the books they publish each year (yes, thousands). And more often than not, these books fail to meet those initial expectations, and can even fail hard (<100 copies sold hard), due to any combination of poor execution by the author (i.e., a bad book) or publisher, and/or a failure to capture the interest or imagination of the bookbuying public in an environment of shrinking shelf space for physical books and an over-saturation of choices online. On the positive side, many books manage to “earn” their advance, after which the author receives a flat/scale-based percentage of the book’s cover price for every copy sold – a royalty. In even rarer cases, a book manages to exceed all expectations and “break out,” far surpassing its estimated sales due to a crucial endorsement (e.g., Oprah’s Book Club), a film or television adaptation (e.g., Crazy Rich Asians), a controversy surrounding the book (i.e., anything Trump-related), or even based on all-powerful word of mouth.

Given the difficulties and lack of formula for a break-out or bestselling success, publishers mostly pursue a ‘blockbusters’ strategy (a term and concept popularized by HBS Professor Anita Elbrse in her academic work and book Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment). The strategy refers to placing a large number and range of bets every year, with an expectation of a high rate of failure, and the hope that a single bet yields outsized returns, compensating for all of the other bets made.

 

Publishing As Venture Capital

If you’re still with me, I doubt it’s too hard to draw parallels between the publishing industry and venture capital. As with technology investing, for every “unicorn” valuation that exceeds $1 billion (e.g., Uber, Twitter, Dropbox, etc.), there are 100 similarly placed bets by venture capitalists that don’t materialize, or fail altogether. Both industries are seen as more of an art than a science, with a high rate of failure “priced in.”

Like venture capital, within the universe of placed bets there are different types of investments, with differing relationships between the level of risk and potential reward. While “pre-seed,” or angel investing, normally takes the form of a series of smaller, diversified bets, late stage venture capital is usually focused on established successes, more complete information, and a much smaller band of expected return (or at least a higher floor.) The same dynamic exists in publishing: it’s much easier to make the case for a celebrity author with an established audience and name recognition than it is for a geeky story about being stranded on Mars by a completely unknown, part-time author.

Post-angel investing normally takes the form of alphabetically-ordered stages, or ‘seed’ rounds, whereby each successive round results in a higher valuation and more capital expended (lest a company undergo the death knell of a “down round,” whereby a company’s valuation shrinks).

Following this logic, the range of publishing bets might look something like this:

Category Fiction Non-Fiction
Pre-Seed / Angel Investment Unknown/debut author Unknown author writing about niche topic
Series A Repeat author with history of moderate success Unknown author writing about topic with established audience
Series B Award-winning author with strong reputation / established audience Renowned author with track record of commercial success
Series C Well-known author with a longtime record of publishing success, strong legacy Celebrity memoir, author with highly established platform
Series D and beyond John Grisham, Nora Roberts, James Patterson Post-Presidential memoirs, or a book by an incredibly prominent public figure

As you go down the chain of investment rounds, the expected value and “floor” of the book’s success of the book is higher, driving more certainty and a higher price. Of course, on the other hand there’s occasionally a chance that a small bet placed by on an unknown entity will have massive returns, such as Paula Hawkins’ The Girl on the Train.

Of course, in any of these cases there’s a risk of failure, so the probability of success can never be 100%. A notable recent example is the ongoing delay associated with George RR Martin’s sixth book in the Game of Thrones series – a book that has already garnered significant investment, but may never actually be completed.

 

Deal Flow

Everywhere you look, it seems like there are new venture capital firms popping up, with new theses on how to achieve “alpha” (performance in excess of market returns): crypto-dedicated funds, machine learning-informed investments, or just an excess of capital (and some hubris) on the part of the founding partners.

Venture capital firms that are unknown or have a limited track record oftentimes have difficulty sourcing opportunities, otherwise known as “deal flow,”  while well-known VC firms with decades of operation a history of successful exits, and a strong reputation in the marketplace are highly sought after, and are oftentimes offered many more deals than they can feasibly participate in.

The result is that smaller or more unknown entities seeking to establish themselves and achieve success akin to the established players resign themselves to one of the following approaches:

  • Overpay: One’s willingness to dramatically overpay or overvalue relative to competing investors will yield a seat at the table that would otherwise not be offered.
  • Make riskier bets: Focus one’s efforts on opportunities that are deemed to risky or unproven by the more established players.
  • Make smaller bets: Deals that have smaller upside are less appealing to established venture investors, who must allocate their finite resources to meet a required return.

Similarly, in the publishing industry authors are much more likely to seek out and sign with an established publishing house, with a renowned roster of authors, a proven commercial track record, strong name recognition and reputation in the marketplace, and well-established relationships with value-added partners (e.g., bookstores, online platforms, book reviewers) to help further propel the book, and the author’s career, to success.

As a result, smaller publishers are oftentimes forced to rely on specific niches that may be seen as having a smaller potential audience (e.g., fiction in translation), and take more chances investing their efforts and capital on unknown entities such as debut authors, or books on obscure topics with limited perceived commercial appeal. As recounted in the WSJ article, this strategy has recently led to both critical and commercial success for publishers like Europa Editions (publisher of Elena Ferrante’s Nepolitanan series), Archipelago Books (Knausgård’s My Struggle series), and Graywolf Press (various recent successes, including Carmen Macado’s Her Body and Other Parties, the adaptation rights to which have been purchased by FX). All three of these publishers, as well as many of their “independent” (i.e., smaller) contemporaries, were prominently featured in the recent 2018 National Book Awards, demonstrating their outsized impact relative to their size (both in books published and invested capital).

In each case, these publishers were able to successfully publish authors that were either overlooked or deemed too obscure for mainstream presses. While these risks have paid off handsomely for their investors, there are countless examples of similiarly-placed and -believed in bets that didn’t perform nearly as well.

 

The Incumbent’s Advantage and Brain Drain

A phenomenon recently seen in the world of venture capital investing, both in the United States and China, is the seismic impact that the established and well-capitalized players in the market can have on innovative companies and their valuations. In the US, Google and Facebook have led the charge of making large investments or outright acquisitions at perceived high valuations (some of which seem shocking low in retrospect) in order to absorb talent and innovation, stymie potential competition, or de-risk their long-term future by diversifying away from their existing products. These investments come at the expense of traditional VC players, who can’t match the offers nor the promises of guaranteed resources and support of the tech elite.

To varying degrees, Facebook’s acquisition of Whatsapp and Instagram fit this category, as does their more imaginative acquisition of the virtual reality company Oculus Rift. On the Google / Alphabet front, they continue to be among the largest corporate investors across its various investment vehicles, and have made major investments into self-driving vehicle technology (covered in fascinating detail by Charles Duhigg in a recent New Yorker issue), as well as a wide variety of futuristic bets in robotics, artificial intelligence, and biotechnology. In China, the impact of the established players is even more pronounced, as a two-horse race to acquire the next great technology by Alibaba and Tencent has led to an explosion of VC investment and outsized deals.

For the entrepreneurs accepting these large investments, the rationale is clear: beyond the sticker valuation, the entrepreneurs are offered access to a near-infinite amount of resources, as well as widespread public credibility in pursuit of their mission that invites further interest, attention, and higher valuations. However, these benefits come with the attached downside of being one in a series of many investments and priorities by these highly diversified behemoths, without the attention that they would be likely to receive from a smaller investor with far fewer bets and a larger stake in the company’s success. Oftentimes, the entrepreneurs opt to take the money, and see the upside outweighing the downside.

In publishing, this is an all-too-common trend: an author is “poached” from a smaller publisher who invested in them early in their careers to take a “risk” on publishing them as an completely unknown entity. Authors oftentimes feel forced to put personal loyalties aside to accept an life changing advance amount, as well as the promise of increased exposure and association with a storied institution. The smaller publishers, who can’t reasonably expect to match the amount and associated promises made by the major players, are forced to accept their role as “incubators” of literary talent (with some limited exceptions). Suddenly, these authors go from being the prize of their smaller houses to just another author on a vast roster and crowded publishing schedule. While this “poaching” strategy is far from a guaranteed success, acquiring these authors is a relatively low-risk way for the larger publishers to acquire market share amidst a stagnant sales environment.

I’m sure there are further parallels to draw, and more concepts to be fully fleshed out, so will likely revisit this topic in the future.

Maintaining Perspective in the Publishing Industry

I joined the publishing industry because I love books, and want to share that love of books with the world. It’s as simple as that. After almost four years working in publishing across two continents, I still get a surge of energy every time I enter a bookstore (especially a new one), start a new book, or think about my “antilibrary,” the term coined by Nassim Taleb currently making the popular rounds for the books in your personal library you’ve yet to read. Books have changed my life, almost exclusively for the better.

The past year or so have not been especially great for books.

A sexual harassment scandal has led to an indefinite suspension of the Nobel prize for literature, the first time the award has not been awarded since 1949. Similar accusations from famous authors and publishing insiders have roiled the industry and shocked booklovers around the world.

In the US, an embarrassing and distracting spat between newly-appointed Barnes & Noble CEO Ron Boire and Chairman Len Riggio led to Boire’s ousting (B&N’s 4th CEO in 5 years) and a messy and publicly-aired wrongful termination lawsuit. Meanwhile, rumors of a buyout of B&N by opportunistic investors (though hardly booklovers) continue to loom.

At a more macro level, the continued movement of book-buying consumers online (i.e., Amazon) has not only has made it more difficult for independent booksellers to compete and sustain themselves, but has also made it harder and harder for readers to discover new fiction, and for publishers to introduce those readers to new authors. As ably recounted in a recent article in Publishers Weekly (What’s the Matter with Fiction Sales? – Oct 26, 2018), amidst shrinking bookstore footprints and the declining incidence of dedicated book review sections in newspapers and magazines, publishers have increasingly few avenues to promote new authors, and an ephemeral leash for supporting non-commercially successful authors. Excluding the success of 2015’s Go Set a Watchman (the opposite of a “new” author), fiction sales have fallen every year since 2013, falling 16% in total from 2013-17. The number of 1M+ unit sales in fiction can be counted on one hand: Watchman (1.6M), Grey (E.L. James – 1.4M), The Girl on the Train (Paula Hawkins – 1.3M), and All The Light We Cannot See (Anthony Doer – 1M).

Think about it: it is easier than ever to find a book about a nonfiction topic of interest, especially written by an author with an established platform, but discovering a completely new author has become more-and-more difficult. As mentioned in a previous post, the messy and unorganized nature of the internet begs for curation – an area where booksellers and the more-biased publishers should readily step in.

Further complicating the consumer book-buying experience, Amazon continues to fiddle with its bookselling algorithm, leading to more and more third party or obscure editions of titles as opposed to linking the publishers’ version (i.e., the version you most likely set out to buy). This type of obfuscation would be impossible at a bookstore, aside from the potential availability of a used copy (readily evaluated via the all-important eye test). See Tyler Cowen’s recent experience trying to acquire a copy of Guillver’s Travels on Amazon (Amazon search is getting worse, especially for classic books – Nov 5, 2018) for reference.

Here in Brazil, my adopted home and publishing market, the past year has been especially grim, also due to changes in the bookselling portion of the publishing value chain. Over the past two months, the two largest booksellers in Brazil, Saraiva (a commercially-focused, 100-location behemoth) and Livraria Cultura (a booklover’s paradise with just 10 stores, but arguably a greater cultural impact) have each taken actions that signal an existential threat to their ongoing bookselling activities.

Over the past few years, both stores have sought to expand their sales offerings, diversifying into so-called “geek” goods (board games, toys, t-shirts, etc.), movies, DVDs, and video games, and most recently, electronics (cellphones, televisions, etc.). Audaciously, Cultura (associated with bookselling for 30+ years) assumed the assets & liabilities of the Brazilian operations of French electronics store FNAC (think Best Buy) in July 2017 – a unlikely, if not outright doomed, marriage from the start, especially considering FNAC’s desire to exit the country altogether.

In both cases, this expansion and movement away from their respective strengths has been catastrophic.

Cultura has now closed all of the acquired FNAC operations (~11 stores) a little more than a year after the change-of-hands was announced, assuming the French retailer’s closing-related costs in exchange for a 14 months of organizational confusion. Cultura has now entered into a Chapter 11-esque process called a recouperação judicial, admitting defeat on their current debts and leaving publishers dependent on Cultura despondent.

Saraiva, citing increased e-commerce competition from Amazon and local players B2W and resulting shrinking margins, has announced a closure of 20 stores (20% of their footprint), and a formal exit from the electronics market as well. A cursory glance at their publically available financials tells a dire story: increasing current liabilities, a shrinking gross margin, and negative operating margins.

Inarguably, it’s a near-worse-case scenario, a perfect storm akin to Books-a-Million suddenly reneging on its obligations while B&N shuts down stores across the US.

Meanwhile, there’s a very real concern that small- and medium-sized publishers in Brazil will not be able to withstand this sudden whiplash and their need to honor their payment obligations to their own employees, suppliers, and authors. There’s an expectation that things are likely to worsen before they improve, as Cultura continues to teeter on the fragile edge of outright bankruptcy, while (optimistically) Saravia begins the sobering process of a complete restructuring of their corporate strategy and future.

(On a personal note, as someone thrust from the cozy confines of a huge, US-based business to a comparatively miniscule Brazilian publisher, this has been educational, to say the least.)

Amid this onslaught of bad news, my priority has been to maintain perspective. Not only as a lover of books (I’ll never forget my first time visiting the Cultura flagship location on Avenida Paulista, São Paulo), but as someone working in the book publishing industry, there’s a continued tendency towards despair (oftentimes shared by the publishing industry itself). The so-called “death of books” has been called for countless times, citing numerous boogeymen (namely eBooks, Amazon, Youtube, Netflix, etc. etc. etc.), with somewhat halfhearted pushback on the part of the publishers themselves each time.

There’s a very strong case to be made that book publishing is not the best industry to invest all your money going forward. There are very real challenges (some of which cited above), and minimal expectation of explosive topline growth (aside from the very real, continued expansion of audiobooks around the world, something we’re working on bringing to Brazil).

On the other hand, books are inarguably as relevant as ever – the richest and most visible people in the world are infatuated with books (Gates, Zuckerberg, Buffet), and take to blogs like my own humble site to talk about the books they love. Even the much maligned Jeff Bezos saw books as his entryway into world domination way back when, and continues to carve out market share in this space, despite seemingly bigger fish to fry (like space). Books about President Trump have consumed weeks of news cycles, and sold millions of copies. And President Barack Obama and Michelle Obama are set to release their own memoirs over the next two years, sure to be similarly explosive megasellers that will provide intangible solace to countless Americans (and people around the world) in search of hope.

In summary, books aren’t going anywhere. We may see less books overall published in the future, and a continued decline in brick-and-mortar bookstores, but as long as consumers continue to want to read books (not only the thousands of new books published every year, but also the hundreds of thousands of books beloved and passed down over generations), there will be places to buy these books. Discoverability will continue to be an issue, and some great books will almost certainly fall through the cracks, but classics are still being published every year (Lincoln in the Bardo’s genius still haunts me), and there will be many more classics in the years to come.

And if you’re still feeling despair even after reading this post: don’t worry – Sam Hinkie’s on the case.

Sam Hinkie and the Future of Reading

Yesterday, former Sixers GM (and savior / saint in the eyes of many), current Stanford GSB Professor and investor Sam Hinkie launched his personal website with an encouraging welcome: “Hi. You’re in the right spot.”

The rest of the landing page was filled with ideas, or “side projects,” that he’s been mulling over and shared with the internet public. His entreaty was fairly simple: “Shoot me some thoughts — or even better a prototype or design — I’d love to hear from you.”

Many of the ideas surrounded books and reading, including an engine to personalize book recommendations (with the complementary quote: “Life is too short to not be reading the very best book you’re aware of at every given moment.”), “explainer” videos for books, and companion pieces to written works (e.g., “Build companion pieces for people to explore Robert Caro’s writing in different ways. Like this visualization of Hamilton lyrics. Or a wiki-style set of source materials.”)

As someone with a lifelong passion for reading who has devoted his career to books via the publishing industry, my curiosity was immediately piqued, and I began compiling an email that drew on ongoing ruminations on books, publishing, reading and learning in our modern age.

I’m publishing my email in full (with some annotations / added hyperlinks) prior any response (and with no expectation of receiving one) to hold myself accountable to continuing to iterate and build on the ideas below.

In Hinkie-esque fashion, if any of this resonates with you, please feel free to reach out.

Hi Sam (& Team):

Thanks for opening up this dialogue – I’m really looking forward to seeing what comes of it.

My passion for reading and books in general led me to working in the publishing industry, where I’ve worked in a variety of strategic and financial roles at Penguin Random House since 2015.

One of the major takeaways that I’ve gained during my time at PRH is the fundamental economics of the publishing industry and the emphasis on the “frontlist” (i.e., books published over the last 12 months), at the expense of the vast fount of already-licensed/under-contract works published over the last 50-2000+ -odd years.

As a result, books filled with relevant and important perspectives, are unknown, or at best under-marketed, -exposed, and -utilized, and mostly floundering out of print or in need of a refresh. One immediately apparent example came out of your discussion with Patrick O’Shaughnessy – the Durant’s Lessons of History.

In addition, as you allude to in both your recommendation engine and explainer video prompts, the way people consume content at scale has changed dramatically over the past few years. While reading is certainly not going anywhere, and podcasts like Hardcore History and the continued double-digit growth of audiobooks are encouraging, the “knowledge” medium is undoubtedly moving shorter and towards video.

An idea that I’ve been thinking through over the past few months is how to translate the longform reading experience in such a way that allows for absorption, retention, and meaning, without the necessary time commitment to read “Lessons” (let alone the entire Civilization series), and minute-by-minute distraction that has become a reality in the developed world.

Along these lines, the “business”/self-help/motivational book market, little of which represents genuine innovation and much of which draws liberally from existing thinkers and texts, continues to be a gigantic market, second in “runaway” success capability to thrillers. The most recent example of this is Jordan Peterson’s 12 Rules, but Ryan Holiday and Robert Greene have sold hundreds of thousands of copies following this formula.

I am thinking about a platform that would combine the recommendation engine and explainer concepts that would provide introductions / “on-ramps” to great ideas, books, thinkers, and concepts in a digestible and discuss-able format (akin to the weekly BBC show In Our Time, though more accessible and less British).

Would love to discuss further. Thanks Sam.

 

Barnes & Noble: What Is to Be Done?

On a day off, I’m finally catching up and catching my breath on the ongoing saga at Barnes & Noble.

For those unapprised, the retailer’s latest CEO, Demos Parneros, was promptly and unceremoniously fired without severance in July, little more than a year into his tenure as B&N’s CEO. The company’s explanation of his departure was fairly ominous, citing “violations of the Company’s policies,” but not “due to any disagreement with the Company regarding its financial reporting, policies, or practices or any potential fraud relating thereto.” Given the sudden firing without any warning signs, and the political and social climate and continued incidence of sexual harassment and abuse from individuals in positions of power, one was left to infer whether his firing was a precaution taken against the #metoo movement.

When Parneros was hired in 2017, he was the 4th CEO hired by B&N since 2013. While Parneros was an outsider, spending most of his career at Staples, he had spent the previous 5 months as B&N’s COO under the former CEO Ron Boire, a retail executive with similar big-box credentials (Sears, Best Buy, Toys R Us, KMart).

Parneros’ was tasked with stemming B&N’s sales decline and improving traffic at B&N stores: lofty, but somewhat typical objectives for a retail executive. In early interviews and press conferences, Parneros cited complementary products like educational toys and gifts as key to turning around the stores. In addition, he was encouraged by the different experimental business models deployed in B&N’s ‘concept’ stores – stores with smaller formats, or restaurants-cum-bookstores like the short lived B&N Kitchen concept (covered previously here.)

B&N’s founder, chairman, and largest shareholder, Len Riggio was enthusiastic about Parneros’ potential: “It has become abundantly clear over the last five months that Demos is a perfect fit for our company and an outstanding choice for Chief Executive Officer. I believe Demos is fully prepared to help foster a new era of growth for Barnes & Noble.”

Unfortunately, the marriage between Riggio and Parneros was far from a success, as outlined in the contentious defamation lawsuit Parneros has brought against B&N following his expulsion. According to the filings, B&N was in late stage proceedings to be sold, a surprising divulgence that was previously unknown. After the buyer rescinded its offer for B&N, potentially as a result of concerning diligence findings, the relationship between Parneros and the hands-on Riggio soured, creating an untenable working relationship between the two leaders. The lawsuit details Riggio’s hands-on and active management of the company, creating minimal maneuverability and a difficult working environment for any CEO. The lawsuit goes further, describing Riggio’s “erratic and unprofessional behavior” and citing specific cases that create a portrait of Riggio as “volatile,” “refusing to relinquish control,” and deeply critical of many of the management surrounding him.

B&N’s response to the lawsuit wholly rejected Parneros’ lawsuit assertions, and placed the responsibility for his firing squarely on his own shoulders. In a brusque, blunt statement, B&N likened Parneros’ lawsuit to extortion, and pointed to “sexual harassment, bullying behavior and other violations of company policies” as the reasons behind his departure, citing detailed episodes from Parneros’ tenure of wrongheaded if not malicious behavior. The statement also took the unusual step of defending Riggio’s actions as described in the lawsuit, and claiming Parneros’ suit was “replete with lies and mischaracterizations.”

Regardless of the ultimate truth in this public spat, which likely contains elements of truth on both sides, B&N is in the incredibly unenviable position of trying to find a new CEO for the business, its fifth in so many years. In the interim, B&N will continue to be led by a triumvirate of B&N executives: Allen Lindstrom, CFO; Tim Mantel, chief merchandising officer; and Carl Hauch, v-p, stores. Missing from this group is Riggio himself, who “remains B&N executive chairman and will be involved in its management,” per B&N.

In an environment when book sales continue to fall, with audiobooks continuing to eat up overall share, and eCommerce (Amazon) continuing to eat up the world, the ongoing executive mismanagement of Barnes & Noble seems like an unforced error of epic proportions. In Publishers Weekly, publishing executives  anonymously expressed disappointment in Parneros’ departure, and the broader and continued instability at B&N. They were encouraged by the early stages of Parneros’ restructuring plans for the chain, including investment in supply chain improvement, a continued downsizing of its retail stores, and broader cost cutting initiatives to enable B&N to continue to compete effectively.

It will be interesting to see how B&N moves forward from this latest episode. One interesting development to keep an eye out for is an outright sale. Many believe that the offer for B&N was made by Indigo, a successful and ambitious Canadian bookseller who has recently expanded its footprint into the United States. Another possibility is Books-a-Million, the second largest US bookseller and a private company. In either case, given the late stage at which the prospective buyer pulled out, it’s unlikely that they will return to the negotiating table to attempt another acquisition unless things take a significant turn for the worse.

In my mind, it’s hard to imagine a suitor for B&N that wasn’t already invested in the bookselling industry. Major players in the retail industry are already beleaguered enough without having to take on B&N and the relatively-needy publishing industry. Amazon is a possibility, but given their modest bookstore ambitious and recent acquisition of Whole Foods, I think it would be an unlikely one.

In the financial markets, an investor named Richard Schottenfeld of the eponymous Schottenfeld Management announced an increase in his ownership stake in B&N to 7% today. With this stake, Schottenfeld joins the ranks of Riggio (12% ownership) and other institutional  investors (Blackrock – 10%, Dimensional Fund Advisors – 8%, Vanguard – 7%).

To complement his purchase, Schottenfeld took the relatively unusual step of providing a rationale for his investment in the related filing. Schottenfeld mentions that he is in discussions with Riggio and B&N management to help spur “changes in company leadership at the executive and board level, implementation of operational improvements,” thereby to increase the “desirability of selling the company.” Sounding eerily reminiscent of Parneros’ introductory musings, in the filing Schottenfeld advocated for a focus on toys and games and less on music and DVDs, driving “higher value” from the cafes, and “enhancement to the experiential aspect of the stores.”

As he further outlines, he believes that “the company represents an attractive acquisition target,” somewhat ridiculously citing the disclosure of the attempted purchase in Parneros’ lawsuit as an “encourag[ing]” sign of other potential suitors for the company. Schottenfeld “encourage[s] the Company to continue in its efforts to explore and seriously consider all available sale transaction opportunities.” Whether there is anything more behind this thesis than provided in the filing is up for debate.

In response to this news, $BKS is up ~12% today.

Meanwhile, B&N just reported its first quarter sales, reporting a 7% sales decline and an $16M operating loss for the quarter, both results more or less in line with the previous year’s results.

Should We Save Barnes & Noble?

David Leonart, a New York Times op-ed columnist and economist by trade, wrote an article earlier this week in the NY Times entitled “Save Barnes & Noble.”

The article makes the case that Amazon has successfully “won” the books category by discounting books to such a level that competing booksellers, with brick & mortar locations (hence, rent, utilities to keep the lights on, and employees to stack shelves, recommend books, and check-out customers) must either reduce their prices to an unsustainable level, or risk outright extinction. By “winning” the bookselling segment, Amazon has organically created a monopoly within the books category (rather than artificially via mergers & acquisitions, the typical driver of antitrust complaints). Victims of their own success in the segment, the author argues that Amazon should be regulated, and subject to price controls / other mechanisms to level the playing field for the lowly Barnes & Noble.

I take no pleasure in Barnes & Noble’s continued struggles, though I do bemoan the manner with which they decided to dismiss many of their longtime, loyal employees, and replace them with seasonal and part time workers. As I’ve explained in previous posts, I’m a strong proponent for the vibrancy, viability, and long-term health of physical bookstores, and continue to invest my own time and money in bookstores. However, I think that the narrative of Barnes & Noble as a sympathetic figure in this saga is undeserved, and serves to undersell the continued disservice that Barnes & Noble has done to the book consumer through their slow adoption of changing consumer trends, longtime confusion around their core value proposition and customer experience, and their continued leadership churn and a resulting lack of a coherent corporate strategy that doesn’t involve dedicating 50% of their square footage to a restaurant.

It’s important to remember that Barnes & Noble was at one point the behemoth incumbent, along with the now-shuttered Borders, and Amazon was the upstart, David-fighting-Goliath. In a recent interview with the CEO Mathias Döpfner of German media company Axel Springer, Jeff Bezos discusses his history in the bookselling trade, and Amazon’s humble origins (believe it or not).

In one particularly illuminating point in the conversation, Bezos recounts the precarious position of Amazon.com in 1997, upon the launch of BarnesandNoble.com (2 years after the Amazon’s founding):

We had 125 employees and $60 million a year in annual sales — $60 million with an “M.” And Barnes & Noble at that time had 30,000 employees and about $3 billion in sales. So they were giant; we were tiny. And we had limited resources, and the headlines were very negative about Amazon. The one that was most memorable was just: “Amazon. toast.”

Suddenly, the context changes, and the perception of sympathy for Barnes & Noble evaporates. The initial refusal, and subsequent late entry of Barnes & Noble into the e-commerce space is well documented, but it’s important not to understate just how sizable this advantage was, even two years after Amazon: Barnes & Noble had established relationships with all of the key publishers, authors, agents, and any other players in the publishing ecosystem, while Amazon had 125 employees.

I’m running the risk of mythologizing here, but I can only imagine the sense of imminent doom that must have loomed over the company. However, as iconically documented in Amazon’s 1997 annual letter to shareholders (and enshrined in every yearly missive since), Bezos sought to leverage Amazon’s technological know-how and vast inventory to continue to focus on the costumer, rather than focus on what they weren’t (a billion-dollar bookseller). He continues:

Look, you know, it’s OK to be afraid, but don’t be afraid of our competitors, because they’re never going to send us any money. Be afraid of our customers. And if we just stay focused on them, instead of obsessing over this big competitor that we just got, we’ll be fine.

Again, one could claim hindsight or survivor bias, but it’s all written there in the 1997 annual letter: Bezos was staring the behemoths of book retailing head-on by focusing on the book-loving customer. By “delighting” the consumer with a vast selection and incomparable prices, he developed a level of loyalty with the Amazon consumer that persists to date.

On the other hand, I don’t necessarily agree with Leonart’s assessment of the inevitability of Amazon’s continued and future dominance in the bookselling industry. While I am fully aware that Amazon has, and will continue to create significant disruption in the publishing ecosystem (too many to list entirely, but a shortlist includes: devaluing the medium through the Kindle Unlimited subscription service, radically shifting the sci-fi, fantasy, and romance genres through its Kindle Direct Publishing self-publishing platform, and allowing for “dumping” of titles via third-party sales), Amazon’s shift away from books presents an opportunity as well. Amazon’s continued global expansion, as well as its entrance into the supermarket, smart home, generic brands, content production, and music (and video) streaming markets (and I’m sure there are plenty others to come) creates an opportunity for the book-focused Barnes & Nobles and Waterstones (the UK B&N) of the world, as well as the upstarts to come.

While I believe that any successful bookstore must have a strong e-commerce platform to compete with Amazon, the future bookseller (B&N or others) shouldn’t necessarily emphasize pricing and logistics as their primary value propositions, just like Amazon didn’t cite their knowledgeable staff, author events, or shopping experience when it was faced with Barnes & Noble’s entrance into the online space. Rather, the future bookseller should taking a page out of Amazon’s initial playbook: not focusing on the existing competition, but on the “delighting” the customer.

In short, the issue of discoverability still persists. Per a Nielsen’s Books and the Consumer survey cited in the Ender’s Analysis’ incredibly useful study of the precarious position of publishers in the new publishing environment, entitled Value in volumes: Books, midlists and retail, half of the books consumers purchased in a bookstore were discovered during their visit to the bookstore. In contrast, online consumers cite just a quarter of their purchases discovered online – half of the effectiveness of the bookstore! The issue of discoverability online remains an issue across all art and media, but I’d argue that it’s been least solved in the book industry. In contrast, Spotify has made inroads in music discovery by using a combination of algorithms and tastemakers to broaden the individual consumer’s access to a diverse selection of music, and Netflix, which once offered a $1 million prize to improve its recommendation / discoverability engine, seemingly no longer cares about any content that isn’t its own (though it may use some combination of manatees / algorithms to conceive of their new shows.)

Despite millions of dollars annually committed to research and development and online “customer experience,” for a variety of reasons, including its prioritization of its own publishing imprints and more profitable self-published authors, Amazon has yet to replicate the experience of browsing a bookstore online. For this reason, as well as their attempts to try and more efficiently reach its consumers, Amazon has begun aggressively opening its own bookstores, seeking to replicate the discoverability experience of a well-curated bookstore through a combination of top-rated titles and new releases, with ample space for Amazon-branded products as well. However, as recently shown by the DC-based Washingtonian Magazine, while Amazon sought to mirror the offerings of its competitor bookstores in its new DC location, its algorithm-generated selection of titles of interest still paled in comparison to local stalwart Politics & Prose.

The future bookseller should overemphasize its singular mission of connecting its customers to books that will “delight” them above all else. The future bookseller can drive discoverability even further by devoting even more shelf space to curated picks, and leveraging the recommendations of the booksellers, celebrities/authors, and local, loyal customers. And even more ambitious, as Amazon continues to expand its purview and global reach, there remains an even greater opportunity (albeit a challenging one) to recreate the bookstore experience online by putting books front-and-center (including their jackets, accompanying videos/interviews, etc.), harnessing online communities of book / author enthusiasts, and driving the customer towards new releases, timeless classics, and obscure titles that would be of personal interest to the customer.

To answer the question posed at the top of this blog post, the question, in my mind, is whether Barnes & Noble is too foregone (or unwilling) to save themselves, and whether there are other players, either incumbent retailers, start-ups, or the publishers themselves, who would be willing to compete Amazon’s prices at this stage. Based on B&N’s recent track record, I think there is reason for skepticism. With regards to another possible entrant, I believe that there are scores of individuals passionate about the future of books, and hope to continue to see new, innovative ways carrying out of one of history’s oldest trades.

Note: I wrote this article in my personal capacity as a book lover and consumer. The views expressed are my own and do not necessarily represent the views of my current or former employer(s).