Publishing Value Chain & Trends 1996 2000

Prepared by Michael Cairns – Managing Partner, Information Media Partners

©Information Media Partners

Book Publishing Industry Value Chain and Trends 1996 – 2000

Information Media Partners: Publishing Value Chain and Trends 1996 – 2000

July 15, 1996

Page 2 of 12



BOOK PUBLISHING - CONTENT DEVELOPMENT

DEVELOPMENT

CONTENT DEVELOPMENT:

Review manuscripts

Review editorial proposals

Identify talent

Review author proposals

(authors, designers,

photographers, lyricists, etc.)

CONTENT ADMINISTRATION:

Negotiate contracts

Determine royalties and

advances

Preliminary financial analysis

Acquire (clear), administer,

and litigate rights

PRODUCE MANUSCRIPTS:

Contract authors, artists

Assign editors

Confirm story, concept, and

timing

Translate manuscripts

MARKETING AND SALES:

Review proposals

Develop preliminary plan and

budget

Develop publishing schedule

PRE-PRODUCTION

EDITORIAL:

Edit manuscript

Accuracy/fact check

Manage author relationship

DESIGN:

Jacket/Cover

Artwork/Photography

Layout/text formatting

PRE-PRODUCTION:

Composition

Equipment, materials and

printing options/costs

MARKETING + PROMOTION:

Sales forecasts

Promotion + Marketing

budgets

Public relations

FINANCIAL SUPPORT:

Title P/L proposal

Capital investment request

Cash management

Pay advance

CONTRACT

ADMINISTRATION:

Administration + litigation of

rights

Content (of editorial product)

review

PRODUCTION

EDITORIAL:

Review editorial and page

layout

Final edits

PRODUCTION/

MANUFACTURING:

Finalize layout

Purchase material (paper)

Confirm timing

Contract with printer

Manage pre-press work

Perform press work

Manage text and cover

printing

Manage binding and packaging

Coordinate warehouse/vendor

delivery

FINANCIAL SUPPORT:

Title P/L accounting

Cost accounting

Cash management

POST PRODUCTION

CONTENT/CONTRACT

ADMINISTRATION:

Contract monitoring and

management

Rights/licensing marketing

Rights inventory management

Litigation of rights violations

FINANCIAL SUPPORT:

Financial reporting

Cost accounting

Royalty accounting

Royalties disbursement


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BOOK PUBLISHING - CONTENT DISTRIBUTION

MARKETING

ASSESSMENT

MARKET

EVALUATION:

Competitive review

Substitute potential

Consumer interest

Positioning

Ancillary market

opportunities

Sub-rights & licensing

opportunities

DECISION MAKING:

Release dates

Markets and territories

Distribution channels

Book club and serial

rights

MARKETING PLAN:

Determination of

promotions

Establishment of price

FINANCIAL SUPPORT:

Development of

budgets

MARKETING AND SALES

SALES:

Goal setting

Presentations

Management of field

sales force

Development of sales

support materials

State adoption sales

planning (textbooks)

PROMOTIONS:

Press releases

Author tours

Other media (TV)

Free product

Review copies

Co-op programs

MARKETING:

Product mailings

Catalogue mailings

Telemarketing

Media advertising

Merchandising

DISTRIBUTION

WAREHOUSING:

Manage stock

Monitor returns

Create special packs

Manage inventory

levels

Manage warehouse

Manage computer

systems

DISTRIBUTION:

Manage distributor

relations

Order processing and

customer inquiries

Negotiate shipping

rates

Fulfillment of orders

FINANCIAL SUPPORT:

Cost management

Inventory

management

PERFORMANCE

MEASUREMENT

SALES:

Sales target

management

Sales cost

management

MARKETING:

Title sell-through

analysis

Marketing data

analysis

Advertising and

promotions budgets

FINANCIAL SUPPORT:

Performance versus

forecast

Title P/L accounting

Inventory

management

Royalty accounting

REVENUE COLLECTION

FINANCIAL SUPPORT:

A/R management

Cash management

Depreciation

Write-off analysis

Royalty accounting

Title P/L reporting

Returns analysis

Remainder analysis


July 15, 1996

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BUSINESS SEGMENT OVERVIEW - BOOK PUBLISHING

INTRODUCTION:

The U.S. publishing industry comprises 20,000 publishers; however, there is significant concentration within a very small number of large publishers.

Publishers such as Simon & Schuster (sales:$1.8B), Reader’s Digest ($1.5B), The Thomson Corp. ($1.4B), Random House ($1.3B), McGraw-Hill ($1.2B) Time-

Warner ($1.2B), HarperCollins ($1.1B), Reed Elsevier ($1.0B), Addison Wesley, Penguin (Pearson, Plc) ($1.0B), Bertelsmann Book Group (BDD) ($1.0B),

Harcourt General ($1.0B), Times Mirror ($0.9B) and Scholastic ($0.6B) are significant players in the consumer, educational and scientific and professional

segments, which account for the majority of publishing activity worldwide. These large firms have gained market share primarily through acquisition (over

the past fifteen years) and continue to add properties in a similar manner. (Data: BP Report 11/27/1995).

In the publishing industry, there are three general categories of books: trade, educational and professional/reference. These segments vary significantly in

management processes, costs, and product life cycles. Trade books (adult hardcover and paperback, juvenile hard and paper back) consist of general interest

and mass market consumer books which include fiction, nonfiction, self-help and how-to books. Educational books include elementary through high school

(EL-HI) and college text publishing. Professional/reference publishing includes directory, journal, and professional books. The book industry is estimated to

have annual sales between $18-$20B with the largest segments being trade books ($8-9B), professional ($5-6B) and EL-HI and College ($4-5B). Sales

growth overall from 1993-1994 was 4-5%, however, there were significant increases within the trade segment (10-14%) and in the professional and book

club segments (10%). Decreases were seen in the mail order and EL-HI text segments. (Data: BP Report 1993 - 1994).

CONTENT DEVELOPMENT:

Publishing companies must always search out new content opportunities for books. Content acquisition consists of the transformation of ideas into

manuscripts and the procurement of existing manuscripts under proposal. Content is typically acquired in a number of ways: 1) an agent submits a solicited

or unsolicited manuscript, 2) an unpublished or new author submits a manuscript to a publisher on their own, 3) a publisher purchases the U.S. rights to a

work not published in the U.S. or purchases the rights previously owned by another publisher. The publisher may also purchase the rights to characters to

create a book(s) based on those characters (e.g., Beverly Hills 90210). Lastly, authors under contract (Stephen King) submit book outlines in advance of

finished manuscripts, but on a prearranged schedule.

Advances and royalties paid to authors vary widely depending on the type of book and the bargaining power of the author/agent (for example, some reference

publications don’t pay any royalties or advances to authors, whereas Tom Clancy may get 20% of retail and $1.0MM advance per title). Typically, royalties

paid to authors are 5-15% of the book’s cover price. Rights traditionally have (for the publisher) extended to all media (paper and electronic, market and

channel); however, with the increasing importance of multimedia and “nontraditional” publishing opportunities, authors are withholding these rights from their

agreements in an attempt to sell them individually.

The acquisition process involves the editorial, business analysis, sales and marketing and legal departments and often requires corporate approval. This group

evaluates and develops ideas which eventually become published product. For educational product, there is often a review board comprised of professors and

administrators who act as overseers and add credibility to the project. (The educational review and selling process can often be highly politicized and difficult

to manage). For reference and technical publishing, there occurs an intense peer review cycle which can often last a year or more after submission of the

original manuscript; additionally, it is often necessary to find a reputable editor for the book or publication.

The level of financial detail required for the acquisition review process differs by segment and by publisher. Generally, for consumer publishing, the greater

the amount of money projected to be spent on authors’ advances, royalty minimums and marketing fees will determine the required level of financial detail.


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For educational publishing the amount of capital investment is often considered significant (a textbook can cost anywhere from $5.0MM to $20MM).

Development can often last a number of years; therefore a specific set of financial requirements must be met, eventually requiring corporate management

approval. The decision to publish will also take into account the possibility of additional revenues from licensing and sub-rights revenue although these

revenues may be difficult to quantify. At a minimum, all book proposals will be accompanied by summary income statements projecting several years of

revenue and expenses. Sales projections estimated by the sales and marketing department is the critical component of this process as expense information is

generally formulaic.

PRODUCTION PROCESS:

Once a title has been approved, it is assigned to an editor who either works with the existing author or finds an author for the product idea. Once a schedule

has been agreed upon, the author creates the product and submits it per the schedule. Subsequent to this, a series of reviews, edits and rewrites take place

until the manuscript is approved. Editing consists of correcting the text, fact checking and resolving legal issues. It is an iterative process which often allows

for final approval by the author and/or owner of the licensed material being used in the book.

Concurrently, the editor is also working with the production and marketing departments to determine the design of the cover, typefaces and layout of the

book. With consumer fiction, this is fairly straightforward with the only significant design work appearing on the cover of the book. Paper, type and binding

requirements generally do not change a great deal. With a children’s title, if the author is not an artist one is found to create the artwork necessary for the

book to be successful. This, again, can be iterative and will involve the editor, artist and author. With educational titles (textbooks) a great deal of time and

effort is required to determine what art work, graphics and photography to use. Once settled, the editor must clear the rights to use these images in the work

being created; this can take a great deal of time depending on the quantity of material to clear.

Then other pre-production decisions are made, such as type of paper (weight, which determines thickness of each page, and finish, shiny versus matte), color

quality (black and white; two-four-six-color pages), method of printing (offset, roto gravure) and other decisions must be made. These decisions are made by

a committee consisting of the editor and marketing and production personnel. The production manager will negotiate with all vendors on matters pertaining to

the production of the book.

Production of the title involves the scheduling and coordination of activities which produce a book in preparation for distribution. These activities include

ensuring that all materials are available, developing the layout and composition, performing presswork and binding and packaging the book for warehousing

and distribution.

Presswork involves typesetting and printing. The typesetting process entails transforming the editorial product (text and graphics) into a format usable by the

printer, which is then used to create plates for the physical printing of the book. Typesetting used to require melting hot lead to create “molds”; ink was

applied to these “molds” and they were then pressed against paper to create a printed page. Typesetting is now achieved in one of three ways: a) text output

(from a word processing file) is photographed and the resulting film is combined with film of the graphic portion (pictures, images) of the book. The composite

film is then used to make metal plates (by chemical reaction) which are then placed on either a Web offset or Roto-gravure machine (discussed below). B)

Typesetting can also be performed by electronically producing a text file, scanning the graphics into the file and electronically laying out the book using a

typesetting software package such as QuarkXpress. A QuarkXpress file is “printed” on “camera ready” film as a conventional printer would print out on paper.

This obviates the need to print hardcopy (paper) replications of each page of the book in order for each page to be photographed (as in the prior example).

Plates are produced from film as above, which is output directly from the electronic file to a film printer. Lastly, C) new technology is allowing publishers to

skip the film creation process and to go directly from the electronic file to the creation of the printing plates. This is revolutionary and not currently widely

used, but will be within the next 3-5 years.


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As mentioned previously, once plates have been created they are attached to either a Web offset printer which prints in sheets (in a series of scissor actions)

or a roto gravure printer which prints on rolls in a continuous flow from start to finish. The amount of color of the book will determine the number of sheets of

film required to produce each page of a book. For example, a “six-color” book will require six different color sheets of film including one text film (black) for

each page of a book. (Only black would be required if there are no color images on a page). The trim size (outside dimensions) of the book or publication will

determine how many pages of each book will appear on each plate. It is critical that the production manager match color pages with color pages in order to

ensure that the amount of color film is minimized. Determining whether a book is B/W, four-color or six-color is a major determinant of the cost of the book

or publication.

Once a book is printed it is ready for binding. How a book is bound will impact how it is laid out and printed. Publications can be saddle stitched (staples are a

form of saddle stitching) or perfect bound. Saddle stitching requires binding “stitched” through the center of the middle page of the publication. The cover of

this type of publication is considered another page and is generally printed at the same time. Typically, only magazines and low page count books are saddle

stitched. Perfect bound books comprise a number of “forms” (whereas saddle stitched books are only one “form”) which are glued together at the spine and

enclosed in a cover that then holds the book together. In this case, the cover is generally printed separately from the rest of the book and usually has

different print requirements (paper, color, etc.).

CONTENT DISTRIBUTION:

Content distribution refers to the process of selling and distributing books from the warehouse through various channels to the public. In total, management

of this function entails inventory management, customer service (order taking and fulfillment, returns processing, order inquiry), the delivery process, product

returns, marketing materials, and often the management of the collection of management information on all products sold by the publisher.

In the early stages of the product development cycle a marketing campaign is developed. As the product is produced, this campaign is implemented and each

campaign varies according to the product segment and revenue expectations. Marketing and promotional activities which are used to generate favorable

publicity for an upcoming product include advertising, trade announcements, posters, review copies, press releases, book signings, author appearances, early

reviews, serialized or excerpted for magazine publication, and cooperative activities between publishers and booksellers such as in-store displays and

prominent shelf space. Publishers are also using their Internet homepages to provide advanced notification of upcoming titles, excerpts, reviews, catalogues,

order information and jacket covers.

The internal support functions that support distribution include: 1) order processing and fulfillment, which receive the orders from customers and initiate the

shipping order and invoice for the customer (customer service and maintenance, telemarketing, international order processing, invoicing, accounts receivable

and product back-list management and inventory management), 2) warehousing and distribution manages the delivery of product to the customer and

manages existing inventory and returns of unsold books (inventory management, warehouse management, freight and traffic management, shipping, bulk

replenishment, material handling kit/custom assembly, returns processing and “kills” management).

Distribution channels vary significantly by book type, with trade books (fiction) sold either to wholesalers (Ingram, Baker and Taylor) or directly to retailers.

Professional/reference titles are generally sold directly to retailers or customers such as professionals, libraries and schools. Some publishers do not distribute

their own books; rather, they contract with a national distributor for the exclusive right to distribute their products. All the major publishers distribute titles

which they do not publish. Contracts for distribution rights also include promotion and sales support from the distributing company. Rates charged for this

service range from 5% - 25% of net receipts. Publishers also sell through direct mail, book clubs and subscription sales. Publishers sell their books to a buyer

at a percentage “off the retail price.” Sales to the national wholesalers are typically made at 55%-65% off retail. Sales to catalogue or book club purchasers

are made at 40%-75% off retail. Sales directly to retailers are made at rates ranging from 45%-55% off retail. All discounts are variable and depend on

quantities ordered, the channel and if the product can be returned to the publishers for credit.


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Unsold hardcover titles are returned for credit to the publishers and are either resold or “remaindered” (written down and sold, for a little as 5% of retail, in

bulk to remainder wholesalers who sell them to retailers). Paperbacks are returned by sending in the torn covers for credit.

Given the consolidation in the publishing industry over the past 15 years, the largest publishing houses have rationalized their distribution processes and many

distribution centers have closed as operations have been consolidated. Significant process and automation changes have not as yet taken place; however, it

remains likely that these operations will be reengineered during the short term. Innovative ways of distributing product have been in short supply; however,

some publishers such as McGraw-Hill have experimented with on-demand educational publishing, allowing professors to select chapters of textbooks and have

the entire book “printed” in college bookstores on short runs. In the two years since this service was introduced, this program has been very successful; the

cost to the purchasers is no more than the cost of a regular text book.

SALES AND MARKETING:

While the production process and distribution processes across the three major segments (trade, education, professional) remain consistent, there are

significant differences in the marketing and sales activities of publishing professionals in each of these publishing areas.

Marketing and sales in the trade segment concentrates on sales force management and incentives, promotions (corporate and co-op) and other programs

(movie tie-ins, etc.). The large publishers all have sales forces which sell the publisher’s books and (in virtually all cases) the products of the publishers for

whom they distribute titles. Smaller publishers have small marketing and sales staffs but no field sales staff. The functions of the field sales forces are either

part of their distribution agreement or they contract with a regional/national rep firm who sells a number of publisher titles. At the larger publishers, the sales

and marketing departments are organized by channel: independent bookstores (Shakespeare & Co), small/large chains (Benjamin Books, Barnes and Noble),

Distributors (Ingram, Baker and Taylor) and special sales (catalogues, libraries, promotions).

The marketing and sales function for educational publishing is entirely different than trade publishing and by its nature is very political. Most educational titles

(and for all the major states) must submit to a review and selection process which pits all submitted or selected titles for each subject area (reading, math,

etc.) against each other. This process is called state adoption and occurs for each subject area on a 5-7 year rotation. Not all states are on the same

schedule; however, most selection processes for each subject fall within a 1-2 year time span. In other words, Texas and Florida may have a reading adoption

in year one and California in year two. In either of these years, the other less important states would schedule their adoptions. Additionally, the next reading

adoption in these states may not be for 5-7 years. This period represents the life cycle of subject area text books. The above three states are considered the

most important states due to their budgets and the fact that they may only select one title per subject area (whereas some other states may select a few

approved titles). Often, if a title is not selected in one or more of these states, the title may do no better than break-even. The largest players in this industry

are McGraw-Hill (School: 1-12th grade), Simon & Schuster (College), Harcourt General (HS/College) Thomson (College) and Times-Mirror (College). There

has been significant consolidation in this business in the last 5 years due to McGraw-Hill purchasing the Macmillan portion of their joint venture (1993), S&S’s

acquisition of the Macmillan College business and General Cinemas’ purchase of Harcourt Brace Jovanovich (1992).

As a result of this concentration, the risk of not gaining a number of significant adoptions has lessened as the number of players has decreased. Sales and

marketing efforts for adoption states are often regimented and state specifically what is acceptable behavior. While personnel is a significant cost in this area,

give-aways and teacher aid packages to support the text, which are provided free, generate tremendous cost and are by far the largest component of the

marketing budget. While there are a large number of states which either act on the recommendation of teachers or allow teachers to choose from an

approved list, heavy sales efforts are made to these groups and, for a publisher, acceptance by this group will mean the difference between breaking even and

significant profit. Sales reps in these sales positions are often ex-teachers and administrators and are duly familiar with the process.


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In the reference area, some of the sales process in the large publishers is handled by the special sales groups who sell to libraries and universities.

Additionally, direct mail from publishers is a significant method of selling these titles (particularly directories). As the electronic component of this product

segment increases, some of the larger publishers have developed special sales groups to sell this material. Discounts to retailers follow the same pattern as

trade (without the deep discounts as the volumes are not substantial). A run-away bestseller in this category may sell only 20-30,000 copies with the average

around 15,000. Libraries typically get 20-30% discounts off retail due to the lending aspect. In this segment, sales are particularly affected by budget cuts

especially in the non-college libraries.

CHALLENGES AND ISSUES/TRENDS:

STRATEGY:

LUCRATIVE CONTRACTS WITH TOP AUTHORS ARE HIGH RISK/HIGH RETURN PROPOSITIONS. Agreements with star authors represent a barrier to entry and

a competitive advantage for the larger publishers relative to other publishers. Significant revenue for sub-rights to publish these works in foreign markets and

other formats exists and sometimes can represent the difference between a profit and a loss. Some powerful authors have withheld the right to market all

rights from their publisher (other than the right to publish in English in North America for example) in an effort to gain the potential other revenue themselves;

it remains to be seen if this will be a continuing trend. Authors (and their agents) must then take on the responsibility of marketing and selling their rights in

other markets which would not be practical unless they were as popular as a Grisham or Clancy. Big name authors are important to publishers not only for

the potential profit but also for attracting new authors, their relationships with booksellers and their command of (preferential) shelf space in stores. While

few would admit it there is also the potential “bribe” factor which allows publishers to withhold key titles from outlets (in lieu of other more cooperative

stores/wholesalers). The primary bookseller trade organization, the American Booksellers Association (ABA), polices this and other heavy handedness by

publishers.

• Related issue: Internal management reporting and information systems need to be able to analyze and report all revenues and costs to a title and author

level. Accurate income statements will enable publishers to determine the true costs of their current author agreements and the level to which they can

bargain for subsequent contracts and additional “name” authors. Frequently, income statements can not be compiled automatically which compile

revenues and costs across business units for a title or author (including sales, royalties and other income). Additional systems-related problem is the

lack of a royalty tracking system which allows them to automatically access when an author advance was paid, when additional payments are due, and

how much of the advance accrual has been paid down. (This information could help the publishers to better understand an author's performance relative

to his/her advance and subsequently improve their advance estimates on subsequent books by the same author.)

• Related issue: Pressure to earn back the large advances paid to top authors means book publishers print large quantities of these titles and flood the

channel. Issues with respect to inventory management, returns rates, obsolescence, and the value of plate all become important issues especially if the

title does not sell as expected. Additionally, if the title does not sell as expected the product life expectancy is obviously shortened and close scrutiny

should be paid to plant costs and the expected amortization rates as well as the aforementioned plate costs. In most cases the amortization rates will be

accelerated.

CHAIN BOOKSTORES AND INDEPENDENTS HAVE BECOME MORE AGGRESSIVE IN THEIR BOOK RETURN ACTIVITY. Increases in new titles and greater

organization and technology solutions at the bookstore level have resulted in a decrease in the shelf life of “untried” titles and even a reduction in shelf time

given to successful titles. The more aggressive approach to managing store inventories in recent years caught publishers off guard and led to higher than

planned levels of returns. More effective planning by both publishers and booksellers and selective title development with greater marketing support should

result in management of this problem and there has been stabilization in this area recently. Publishers have no knowledge of actual demand at the bookstore

level or even the wholesale (intermediary) level and unexpected changes in demand can catch a publisher unaware as forecasting techniques are often not


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particularly sophisticated. Forecasting using point of sales data (similar to the methods used by some consumer products companies) will radically improve

the accuracy of publishing company’s forecasts; however, this will not occur in the short term. Some of the major publishing houses have created their own

proprietary forecasting software packages and these are all (to date) based on attributing prior unit sales history to the same (i.e. reprint) or similar future

titles. In addition, many publishers still maintain the traditional open return policies (it is not uncommon for a bookstore to return old dusty copies of a book

and order new ones). Perhaps publishers need to understand the effect of taking a more aggressive stance with respect to return policies.

CONTENT MANAGEMENT AND THE ESTABLISHMENT OF DIGITAL ARCHIVES OF PUBLISHED MATERIAL IS RAPIDLY BECOMING THE SECOND PHASE OF THE

DESKTOP PUBLISHING (DTP) REVOLUTION. The establishment of digital archives for all text, photos, maps, diagrams, artwork, audio, etc is of increasing

importance as on-line publishing and the opportunities for selling “chunks” of existing (traditional) products becomes daily more likely. Issues of

standardization of production software and the requirement to guard against redundancy are critical operational issues (later versions of QuarkXpress cannot

read files created in earlier versions of the “same” software) for all publishing companies. Companies are choosing a corporate wide standard (i.e.: Acrobat)

software package which will be the standard file format for their digital archive. All finished product will then be translated into this standard package from a

very limited number of acceptable software packages. This standard file format will then unify all the contents of the digital archive. Strategic issues center

around the following:

• “Back office” controls such as contract management, royalty collection and management, and copyright protections will become a significant issue as more

and more product is sold via on-line distribution and in non-traditional formats. In theory, customers will be able purchase a product in any format they

desire: an image, chapter, paragraph, drawing, diagram, book, audio sample, etc. Currently, there is no universally acceptable method or methodology

for capturing the revenue from these types of transactions and internal accounting systems (particularly royalty systems) can’t handle “chunking”.

Publishers are working on this and software developers are also developing solutions. IBM recently announced a clearinghouse system which charges

users and returns revenues to content owners (for those who sign up). In the long term, and in conjunction with their Internet presence, publishers will

need to do these themselves. IBM is also working on software which will “tag” downloaded content so that a charge or “toll” is initiated each time

material, is forwarded to an additional user. Thus, this system begins to attack the potential loss of revenues from unauthorized use. In order to

maximize the benefits from on-line access to a publisher’s material a set of coordinated policies and standards need to be enacted across the organization.

Potential customers will want one source of material and one consistent method of billing/pricing.

• On-line publishing opens up a potential worldwide market, however rights to products may preclude sales in any other but select markets (i.e.: North

America). Existing products often require a number of different royalty agreements all with different rights. For Example, rights granted for text in a

book may allow publication worldwide but the rights granted for images in the same book may only allow publication in North America. This is not an

issue for a book intended and distributed in the North American market (and publishers go to great lengths to uphold the restrictions on markets in order

to maintain the value of their sub-rights in other markets); however, online publishing does not easily allow regional or geographic restrictions. Current

revenues are small from online distribution but as they increase this channel conflict will need to be addressed.

• Some publishers, particularly journal and directory publishers will need to adapt rapidly to an environment where the traditional printed product is no

longer the acceptable method of delivery. Digital files (updated more frequently) will be required by libraries and by customers accessing the material

online.

THERE IS A POTENTIAL CHANGING PARADIGM IN JOURNAL PUBLISHING DUE TO THE ABILITY OF AUTHORS TO SELF PUBLISH THEIR RESEARCH. Journal

publishers historically represented the only reputable means for scientists and researchers to publish their works. Submissions were received by the journals,

reviewed by an editor and a peer review board and them revised and published. This process can take a year or longer. The author receives no money for

their efforts; rather, it is the prestige of being published by one of these reputable journals which they strive for. In the last few years electronic networks

have developed (accessible through the Internet) which allow scientists and researchers to publish their works without going to a publisher (i.e., Reed-


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Elsevier). This process for the scientist has significant benefits: they do not have to pay to have it published (which is sometimes the case), they get fast

responses and feedback from their peer group and they can readily access up to date material for future work. Traditional publishers (like Reed-Elsevier)

have relied heavily on these scientists for material to publish their often obscure but highly profitable journals. There is a danger that their businesses may be

forced to change to match the capabilities of the Internet. Reputation and the process of publishing (reviews etc) will remain important advantages for the

existing journal publishers however timetables and price structures may need to change. While prices charged to universities and libraries may come down

dramatically, costs of production may also, as journal publishers forego print versions and merely download directly into digital (content) libraries at

universities and libraries around the world.

CHANGING MARKET REQUIREMENTS MAY REQUIRE DATABASE PUBLISHERS (I.E.: DIRECTORIES) TO SIGNIFICANTLY CHANGE THE WAY THEY DISTRIBUTE

THEIR PRODUCTS. These publishers will need to monitor carefully the changing market requirements for products to be produced in electronic versus

traditional ways. Issues relative to production, distribution and digitization of past, current and future material will exert tremendous (and possibly

insurmountable) cost pressures, and some publishers will not be able to make the transition to online publishing. In a similar situation to journal publishing,

more and more directory material is becoming available online as well as in print. Online has cost advantages for publishers as it is far cheaper (in theory) to

produce material for online distribution; however, as more of this material is available online, customers are resisting the traditionally high subscription rates.

Online access allows greater search capability allowing subscribers to get exactly what they need. As a result, they may resist the requirement that they

subscribe to the entire directory including material they will not use. Publishers may be unable to charge high subscription rates across the board and will be

required to develop a number of flexible pricing schemes. It remains to be seen what the impact will be on directory profitability. It is likely that online access

will broaden the distribution of this material and, together with cost benefits (as print versions are phased out completely) may result in increased profits.

NEW COMPETITORS ARE POSITIONED TO PROVIDE ELECTRONIC PUBLISHING. Software development companies produce and market software titles in the

same way book publishers produce and market books; where these two markets converge, there will be conflict and intense competition between traditional

and software publishing. Traditional publishers are not comfortable with selling or supporting electronic media (however all the major publishers are

significantly involved), whereas software publishers’ sales and marketing departments are full of personnel with consumer products experience and therefore

may be better able to compete. The natural market place for content based software titles (as opposed to directories and application software) is the

bookstore because the target market is similar and the environment (bookstore) is more amenable to these products. Software companies however do not

have strong distribution into these channels and in many of their content agreements with publishers they are precluded from selling into this channel. Book

publishers on the other hand are not equipped to effectively sell software in any channel. As a result, software is undersold in the book store channel. Over

the next few years, this conflict will be resolved as sales forces on both sides become more sophisticated, older content agreements are revised and

renegotiated and bookstores commit to selling computer titles.

OPERATIONS

A STRONG RELATIONSHIP BETWEEN AUTHOR AND EDITOR IS CRITICAL. Publishers need to manage the editor relationship more closely as powerful authors

have been successful in taking their editors with them when they leave a publishing house. John Grisham has hired his own editor who works for him (hired

from his publisher) and is, as a consequence, paid more in royalties by the publishing house. This trend may continue and may change the dynamic of the

publisher, editor and author relationship.

RISING DIRECT COSTS, PARTICULARLY PAPER AND MAIL COSTS HAVE SIGNIFICANTLY SQUEEZED GROSS MARGINS. Recent news reports have suggested

that costs are expected to increase 8-12% during 1996. (As of July 1996 this appears to be premature, however the risk always exists).

TECHNOLOGY:


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THE TECHNOLOGICAL IMPACT OF THE INCREASING EASE OF INFORMATION COLLECTION AND DISTRIBUTION WILL INCREASE COMPETITION AMONG NON-

CREATIVE CONTENT, REQUIRING LEANER COST STRUCTURES, FASTER PRODUCT DEVELOPMENT CYCLES, AND INCREASING SPECIALIZATION. The degree to

which information is considered a commodity (i.e.: directories) will impact the traditional large monolithic professional publishers negatively unless they can

develop lean, aggressive, adaptable management and cost structures.

TRADITIONALLY, PUBLISHERS HAVE BEEN SLOW TO EMBRACE COMPUTER TECHNOLOGY AND AS A RESULT MANY PUBLISHERS COULD BENEFIT FROM MORE

EXTENSIVE COMPUTERIZED EDITORIAL AND PRODUCTION SYSTEMS. These systems can significantly reduce production and development costs. As quality

control is extremely important during the labor intensive editing process, software has been developed to increase speed and accuracy of the editing and page

make-up process. Sophisticated unified software solutions including publishing control and management systems (including version control) will continue to

impact the publishing production process.

• Related issue: Back office financial and order management software is often old and of antiquated architecture. Unified software solutions do not exist

and current systems are a patch work of solutions developed over (often) the last 20 years.

PUBLISHERS HAVE BEGUN TO EXPERIMENT WITH “ON-DEMAND” PRODUCTION OF TEXT BOOKS. Under this program, teachers and professors have the ability

to request particular chapters for text books they want to use in their classrooms. The request is submitted to the university bookstore which then produces

and binds it for sale to students. This format is becoming increasingly popular and impacts inventory management, demand planning and royalty accounting.

While this is mainly a custom packaging exercise, it is a precursor to distribution on demand to university networks and digital libraries which will allow

students to access text (predetermined by instructors) on-line.

ADDITIONAL DISBURSEMENT OF CORE PUBLISHING STAFF WILL CONTINUE. Establishment of sophisticated communication systems (Lotus Notes, etc)

leading to the ability to place core publishing staff (editors, production staff, designers) outside metropolitan areas (New York) as back office operations have

been for many years. A result could be a major decrease in factor costs.

ELECTRONIC ORDERING WILL STEADILY INCREASE AS THE METHOD OF ORDERING PRODUCTS FOR ALL WHOLESALERS, DISTRIBUTORS, AND BOOKSTORES.

Publishers had been slow to utilize EDI and other electronic order methods, however due to an Association of American Publishers (AAP) led initiative, over 70

publishers are electronically linked to over 3,000 bookstores through the AAP PubNet system. Rapid turn around and greater accuracy have been benefits of

this technology and these were selling points historically offered by wholesalers. Together with better discounts offered to bookstores by publishers than by

wholesalers to bookstores, there may be an increase in more direct to bookstore orders fulfilled by publishers than has been the case in the past. Publishers

would like to broaden their distribution (particularly to independent bookstores) to balance the distribution to large wholesalers and chain bookstores.

TRENDS:

CONSOLIDATION IN PUBLISHING WILL CONTINUE. Large publishers have consolidated over the past 15-20 years particularly in trade and educational

publishing. This trend will continue as publishers continue to recognize the validity of increasing their back lists and utilizing excess capacity in their back

office and sales and marketing operations.

THE TRANSFER OF POWER TO LARGE CHAIN RETAILERS SQUEEZES MARGINS AND REQUIRES STREAMLINED OPERATIONS. As publishing fulfillment

operations have become more efficient, publishers have been able to offer better discounts to smaller publishers which in turn have squeezed the margins of

the middle market wholesalers. Ingram and Baker and Taylor the largest wholesalers will not be impacted however, there may be consolidation in the middle

market wholesale business as more publishers deal directly with bookstores.


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• Related issue: Publishers are increasingly seeking customer and sales information from channel intermediaries, who also wield power with retailers for

shelf space and information.

MANY PUBLISHERS HAVE ESTABLISHED HOME PAGES ON THE INTERNET (WWW). Publishers experimented with computer software publishing in the mid

1980s and universally failed. Recently, some publishers have backed off their investments in multimedia (Harper Collins & Penguin) as development costs

escalated and back end support was underestimated. It remains to be seen how Internet use by publishers will develop (most publishers appear committed to

the medium). Most web sites currently allow the purchase of books (volume is low), access to reviews, and other marketing related materials. Some

publishers (in contrast to the above) have entered joint multimedia development programs (Random House), whereby the publisher contributes content and

the software developer the software know-how and software marketing expertise. To date (with the exception of games manufacturers) distinctive new

publishing products for the electronic medium have been slow to develop.

• Related issue: Blurring lines between content of information, education and entertainment products and converging publishing formats create new

product and licensing opportunities as well as more challenging market positioning strategies.

ELECTRONIC PUBLISHERS AND TRADITIONAL PUBLISHERS MAY SPAWN THE NEXT WAVE OF MERGERS AND ACQUISITIONS IN THE PUBLISHING INDUSTRY.

With significant cash flow, healthy balance sheets and strong growth prospects it is conceivable that an existing electronic publishing company may seek to

purchase one of the larger traditional publishing companies. Such acquisitions would provide access to content, development skill and distribution.

THE EMERGENCE OF WHOLESALE DISCOUNT CLUBS (SAM’S, WALMART) AND “SUPERSTORES” (WALDEN BOOKS, BARNES & NOBLE) HAS SIGNIFICANTLY

CHANGED THE ECONOMICS OF PUBLISHING. There has been a significant shift toward high-volume sales and a consequent shift in power to these large

purchasers of books. As a result, publishers are beholden to these buyers not only for the revenue effect but also for the economies of scale their products

generate. There has been a significant expansion of the consumer book market due to these new outlets, but it is debatable whether these large customers

have exercised their potential power over publishers to a disproportionate degree

ALTERNATIVE NON-BOOK PRODUCTS (CD-ROM, ONLINE VERSIONS) WILL EXPERIENCE LESS “WEAR AND TEAR,” Publishers have generated significant

“repeat buys” of traditional printed products to libraries etc. simply because the product was worn out; non-book products may have a longer physical life.

This trend may lead to more products being “updated” with a new chapter or foreword etc in order to induce the customer to repurchase the “newer” product.

PUBLISHERS WILL OUTSOURCE MORE OF THEIR NON-CORE OPERATIONS. Houghton Mifflin recently outsourced their distribution operations (to Ingram’s PRI)

and despite initial problems executives view it as a success and anticipate that other publishers will consider outsourcing. Other publishers have outsourced

elements of their finance function and it is clear that other reengineering and outsourcing opportunities exist at most major publishers.

Business

Publishing Value Chain & Trends 1996 2000