Authors, Books, Business Models, Commerce, Controversial Topics, Technology, World of Tomorrow

What We Should Learn from the Collapse of Borders

Borders closing in the Bullring

Image by markhillary via Flickr

The collapse of Borders is more than the failure of just another retail operation.  It’s also a wake-up call to any publisher who takes its business ecosystem for granted, whether that publisher is in books, journals, or anything else.

But first, let’s spend a minute on the life and times of Borders, which is an amazing tale. One way to look at the demise of Borders is as perhaps the loudest signal to date that the disruptive forces now penetrating every corner of the publishing industry are not waiting for some far-off time before they take their place at center stage. Up until now, to a very great extent disruptive technology has been domesticated.  This is the case with research journals, for example, which are largely dominated in electronic form by the very same publishers that dominated the game when it was all print.  And of course we have all been treated many times to interviews with luminaries, whether industry figures or authors or even the occasional celebrity who simply must offer an opinion on every topic, who pronounce that “there will always be print.” Yeah, right. In fact we have known all along that this play will come to the end: at some point the hero of print will fall on his sword and the digital demon will step forward, proclaim the new era, and invite us all to download a copy of Ray Kurzweil on the Singularity.

But Borders! That’s a hard one to ignore. In one stroke over 500 retail outlets disappeared, which, even at the end, still comprised over 10% of U.S. trade book sales and a significant percentage of the sales of even scholarly publishers. It was not so long ago that Borders’ market share was double that; combine that figure with Barnes & Noble’s 30% (some put that figure lower), and you had one-half of the U.S. trade business. (Amazon, at 12-15% was the number 3 player.)

The demon of disruption went into hyperdrive on June 29, 2007, when the first iPhone was launched. Five months later came the Amazon Kindle. That’s fewer than 5 years to unravel an entire industry. The stewards of esteemed publishing companies, whose histories go back 50 years, 100 years, even centuries, should take note. Brands are not an insuperable fortress; a high wall is nothing to a man who can fly.

But the lesson of Borders is not about the advent of new businesses and threats; nor is it about the many mistakes made by the Borders management, so many that you can only shake your head in wonder.  (The saga of Borders is beautifully chronicled in Business Week.)  The real thing to take from Borders’ collapse is that the old infrastructure will not always be there. In one stroke trade publishers lost a huge chunk of their distribution network. That network was not simply sitting around patiently, waiting for publishers to get their digital game plan ready. The distribution network collapsed before the publishers were ready and suddenly unleashed a number of forces for which no publisher was truly prepared. Consider what it now means to operate in an environment dominated by Amazon: the #2 distribution channel for trade books and #1 for most academic titles; a company with over 50% of the rapidly growing ebook market; a leading purveyor of used books; and now a publisher as well, originating titles in direct competition with its primary vendors. Borders provided a bulwark to at least some of Amazon’s advances, but now no more.

I began thinking about this subject in earnest recently when I overheard a publisher remark that his company could “always” outsource its physical distribution. Always? At this time there are many options for the physical distribution of books, but the heads of these operations are mindful that the secular trend is not on their side.  With ebooks now comprising about 20% of all trade books (the figure is under 5% for scholarly titles, though some academic publishers are approaching double digits), how long will a warehouse be a desirable asset? And to what destination would such a warehouse be shipping books? To the rapidly dwindling number of bookstores? To the libraries whose budgets are under pressure and that give higher priority to serials? “Always” is a relative term; it means a period of time greater than the imagination of the person who utters it.

It could be said that the ability to find a manufacturer of print journals is not in question since there are so many print-on-demand solutions available now, and this is true. But I wonder about the intermediaries that handle print distribution. They will continue to handle such distribution for as long as it is profitable, but not a minute longer. With declining volume, the path to unprofitability can be seen on the horizon.  Unless such intermediaries develop strong digital solutions, entire companies could collapse.  I don’t intend to name any names here, but I encourage all publishers to think about their trading partners and to consider if all of them will be in place in 10 years or even 5 — or shall we say 2 or 3? It’s a scary piece of scenario-planning.  And look at the competition for the actual act of enabling the consumption of content, which is almost entirely in the hands of consumer services: Amazon, Google, Apple, and Barnes & Noble. It’s not enough to do a good job any more; now you have to do a big job as well.

There is a vicious cycle when it comes to declining utilization of a legacy business. For example, by some reports, the growth of ebooks plus the decline of physical bookstores has led book publishers to reduce the print runs of trade paperback titles by 30%. This means that the unit cost of each copy rises because of the loss of scale.  Higher manufacturing costs lead to higher retail prices, which lead to more defections to ebooks, which lead to reduced print runs, and so on. This would not be so bad if it were not for the fact that Amazon’s giant maw is thus positioned to gobble up even more market share — which will put pressure on publishers’ margins, making them less competitive to bid for first-rate authors — a bidding war that now includes Amazon. I have never before seen any company as brilliantly positioned as Amazon. It’s as though Atlas held the world on his shoulders and decided to tip it in the direction of Seattle.

The reason to be mindful of the ecosystem that supports a print or legacy business is that those businesses serve, as it were, as venture capital for the new all-digital businesses that all publishers are contemplating.  How do you finance the creation of a new set of interactive apps or a new semantic search technology or the architecture to support linked data? For most publishers, the answer is that you redirect some of the cash flow from the legacy businesses into the new businesses. One company I have worked with has an investment plan unequally split between digital and print activity. Digital gets 90%, print 10%. But on the revenue side, digital now comprises just over 5% of volume. This sounds crazy, or at least unfair, but that plan is based upon some careful thought as to what the industry will look like in 3-5 years. But without the cash flow from the old print activity, there would be no future business, at least not for this company.

It’s a sobering thought to think that the primary business relationships an organization has today may not be relevant in even a few years.  That printer, that wholesaler — even the conversion houses: they may all find the next few years to be tough sledding. And if they cannot navigate themselves to a profitable future, how will this affect your business?

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About Joseph Esposito

I am a management consultant working primarily in the world of digital media, software, and publishing. My clients include both for-profits and not-for-profits. A good deal of my activity concerns research publishing, especially when the matter at issue has to do with the migration to digital services from a print background. Prior to setting up my consulting business, I served as CEO of three companies (Encyclopaedia Britannica, Tribal Voice, and SRI Consulting), all of which I led to successful exits. Typically I work on strategy issues, advising CEOs and Boards of Directors on direction; I also have managed a number of sticky turnarounds. Among other things, I have been the recipient of grants from the Mellon, MacArthur, and Hewlett Foundations, all concerning research into new aspects of publishing.

Discussion

14 thoughts on “What We Should Learn from the Collapse of Borders

  1. Putting 90% of one’s investment money into a product line that only produces 5% of revenue is a bold gamble indeed, a very big bet. I would love to see the revenue projections that justify it. This may not be something everyone should do.

    Posted by David Wojick | Nov 29, 2011, 7:52 am
  2. Joe has identified a very real problem here, but I would separate this from the question of why Borders failed. I do not believe that borders was the canary in the mine. Borders had become irrelevant for many academic publishers long before it went belly up. We stopped dealing with Borders at Penn State Press many years before it went bankrupt. Here are some of the reasons why, as explained by the Press’s former business manager:

    1. Price discrepancies. They would never update their database with price changes and then would deduct the difference on their check when we billed the correct price on the invoice. It got to the point where we needed to send the order back to them to confirm the prices before we generated an invoice.

    2. Chargebacks — the biggest headache of all! When they would return books they would be A) the incorrect books or B) damaged due to poor packing. When we created a credit memo, we deducted the amounts for the discrepancies, however, they would deduct the full amount of the return on their payment to us. Of course, the amount of the credit memo and the amount they deducted were different so we would spend hours trying to reconcile the differences. Very few times did they ever re-pay these amounts.

    3. Poor customer service — never responded to our inquiries.

    4. Always trying to leverage better discounts that were not consistent within the industry (of course, this is against the law).

    For university presses, a great deal depends now on the success of the new ebook aggregations offered by MUSE, JSTOR, etc. If they do not succeed quickly in closing the gap between print and ebook income, the game is over for university presses and they will have no choice but to explore whether OA will work for scholarly monograph publishing in a broader way than the limited experiments by a few presses have so far attempted. This success, of course, rests on a shaky premise, viz., that the library market can sustain university press monograph publishing in the ebook era as it once did in the print era. With library budgets everywhere under severe pressure, I wouldn’t bet a lot of money on this strategy working out.

    Posted by Sandy Thatcher | Nov 29, 2011, 11:42 am
  3. “a high wall is nothing to a man who can fly.”

    ““Always” is a relative term; it means a period of time greater than the imagination of the person who utters it.”

    Great quotables, Joe — and a great post.

    As one who has said “there’ll always be print,” I still stand by it — just like there will always be Legos, no matter the array of other mental toys.

    But scholarly books aren’t plastic bricks, and their creation and market chain is far more fragile.

    One could also productively compare Amazon to Wal-Mart, and the demise of local stores and regional production systems. Small local stores tended to carry some regionally-produced stuff that would never break into Wal-Mart. As small stores disappeared, we also watched the rapid collapse of small-market, regionally-produced specialty production, because most of that economic sector’s sales ecosystem had been erased.

    At the risk of embarrassing myself by paraphrasing (according to Wikipedia) Niemoller’s famous “there was no one left to speak out for me” statement:

    First they came for the independents, and I was sad, but still had markets.
    Then they took the small chains, and I was silent because Big was Better.
    Then they killed the large chains, and I said “well, that’s business.”
    Then there was Amazon, and there was only one left to sell to me.

    Posted by Michael Jensen | Nov 29, 2011, 12:35 pm
  4. “the growth of ebooks plus the decline of physical bookstores has led book publishers to reduce the print runs of trade paperback titles by 30%. This means that the unit cost of each copy rises because of the loss of scale. Higher manufacturing costs lead to higher retail prices, which lead to more defections to ebooks, which lead to reduced print runs, and so on.”

    Yes—but, I still see a bright future for print books. It just looks a lot different than cheap pulp. There are collectibles (high-end print books that are keepers, superior quality), originals (limited edition, scarce volumes—think Margaret Atwood’s “dead moose” drawing from her talk on digital publishing), consumables (think paper airplane folding, die-cuts, stickers), books plus (packaged with a toy or game or model or sound chip or whatever, a la Klutz or Silver Dolphin), cheaper POD/Espresso Machines. (Wouldn’t it be great to have a desktop model for the price of today’s laser printer? Is that where this tech is heading?)

    Print will evolve into what it needs to be, in essence—a content container with certain unique advantages over other containers. You can keep it (forever), access it anywhere and without a device, consume it, share it, manipulate it, produce a one-of-a-kind, etc.

    Posted by Lorraine Hopping Egan | Nov 29, 2011, 5:09 pm
  5. I have little patience or sympathy with companies – or industries – that fail to move along with disruptive technologies. I’m not well acquainted with the book publishing industry, but I’m intimate with the newspaper publishing industry.

    I respectfully disagree that “there’ll always be print,” except perhaps in the boutique sense. Against all documented trends and clear evidence, the newspaper industry chanted that quote until it was almost too late. It’s already too late for many papers; and the end is clearly in sight for all papers that continue to tie their core product – content – to a pulp and ink manufacturing factory.

    The question for both newspapers and book publishers – both of which package and distribute ideas, information and thoughts – is whether they have the foresight and fortitude to make revolutionary changes now. The door is slamming shut, and many aren’t going to be able to make the fundamental changes in time; inertia is against it.

    Posted by jondonley | Nov 29, 2011, 6:00 pm
    • I beg to differ to this extent: newspapers are, and always have been, disposable items; books are not. People build libraries of books. Have you ever heard of anyone building a library of back issues of newspapers (except, maybe, an academic library)?

      Posted by Sandy Thatcher | Nov 29, 2011, 6:39 pm
      • Sandy, if it’s true that books are not disposable items, then that fact will come as a shock to academic libraries, which dispose of books all the time. Disposing of books is an important part of building a library, given that virtually every library labors under significant space constraints and works to support changing research needs. Some books are more disposable than others, of course; those that are truly not disposable (because they’re rare or unique or significant as physical artifacts as well as containers of information) tend to go into special collections, but they comprise a relatively small and segregated part of most research collections. The working collection is always characterized by flux.

        Posted by Rick Anderson | Nov 30, 2011, 11:58 am
        • I was speaking principally about individuals, not libraries, of course. It is true that individuals need to weed their own libraries from time to time (when they decide to move, for example, to a smaller home), but hardly anyone will buy a book and dispose of it immediately after reading it. The decision to purchase, as opposed to borrowing from a library, usually indicates some motivation to keep the book for a while. But does anyone save a newspaper after reading it (and, perhaps, clipping a few articles for saving)?

          Posted by Sandy Thatcher | Nov 30, 2011, 1:30 pm
  6. Great post. My comments echo some of above, aren’t specific to academia and are likely obvious in terms of general consumer trends. Unfortunately Borders, Barnes & Noble and other big box stores vanquished local independent stores in many towns (and not just small towns – compare the number of book stores in Boston/Cambridge area today to just a few years ago.) Amazon is just following in their footsteps. Also unfortunate is that print probably will almost completely disappear and like it or not our personal libraries will reside on online book seller servers. I’m still purchasing print books but primarily read newspapers online (w/ paid subscription of course – I still get the Sunday papers.) It isn’t just books – for music I still purchase compact discs primarily due to superior sound quality, but apparently major labels will start phasing those out soon…

    Posted by Bob Kowalski | Nov 30, 2011, 7:00 am
  7. Brilliant post. Perhaps there’s one more thing to consider in relation to the future position of publishers in this new world where the old business model has been comprehensively overtaken by digital events. Sometimes these discussions forget the orginators of content, the authors. However you deliver it, you (even if you’re Amazon) need content that is desirable. With the weakening of the publishers’ position, and the opportunity for authors not only to be commissioned by Amazon, but to self-publish with Kindle, publishers will have to work incredibly hard to justify the differential in royalty between self-publishing and the percentage a publisher normally pays on ebooks. A top priority for publishers is to make sure that everyone in the industry understands the value that they add. This understanding ought to be basic hygiene, but in my 35 years experience of the industry, and much as I love it, that hasn’t always been the case. At the very least we need to get that right, or we’ll go the same way as Borders.

    Posted by Philip Walters | Dec 1, 2011, 1:11 pm
    • I agree, but many publishers have not helped their cause by cutting back on copyediting and proofreading and putting out books that are chock full of basic errors. And these include, I am ashamed to say, even some of the most prestigious university presses.

      Posted by Sandy Thatcher | Dec 1, 2011, 2:59 pm

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