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?