Wednesday, March 28, 2012

Big Screen - Little Screen v. Paperback - E-Book: A Comparison

Let us compare and contrast how the movie industry coped with the advent of home theater, and how that same logic might apply to traditional paperback publishing, and the forthcoming e-book publishing wave.

It's all about revenue
Let me say it again: REVENUE. That's cashflow into a company's coffers. For a movie studio, they initiate that cashflow by printing out reels of their movies, and shipping said reels to local movie theaters around the world. Money exchanges hands.

Book publishers initiate revenue the same way. They print books, and ship them to retailers all over the world. Again, money exchanges hands.

In this way, the revenue stream is brought forward in time, well in advance of the first movie ticket or book purchase. Note that a large amount of cash flowed between companies, without one customer purchase.

This is the inventory model on which capitalism is founded, folks. This is how our global economy works.

It's all about distribution
Movie studios don't distribute movies -- theaters do. Each theater licenses and presents the titles they think will be popular, locally, and pitch them in local advertising venues such as billboards, radio stations, and television ads.

Likewise with printed books sent to local bookstores and national chains. They know their customers, and can react quickly to local mood swings.

The point is this: Movie studios and publishers do not interact directly with the customer! They send their product to local distributors who do this for them.

Again, this is how our economy is designed.

It's all about going big first
Movies first go to the big screen. That's where they generate up-front revenue (from the inventory sales), and gain the most market exposure. They also enjoy rich ticket sales from the licensing. A family of four might spend $45 to see a theater movie, while if they wait, an entire houseful of guests can watch the same movie for $1 out of Redbox.

Books are no different. They go first to hardback. Hardbacks display well on the shelves, are more likely to be placed cover-up and cover-forward, and are often accompanied by additional marketing material such as posters, billboards, and book signings. They also have a higher profit margin for the publisher.

Then, after the initial market response is gauged, they move onto paperback, with a wider and more voluminous distribution. There isn't a good correlation to movies here.

This is where the money is truly made. The distributors enjoy their cut, while the publishing houses and studios enjoy theirs.

Again and again, our economy at work.

Now we get to the cheap stuff
After the movie release, after the hardback-paperback release, we move onto the next phase of distribution.

For movies, it is the DVD sales. There isn't a literary correlation to this. The DVDs generate up-front revenue, because they are still based on the inventory model of distribution, but they are not a significant source of revenue.

After that, movies go to On-Demand, followed later by Netflix. With each step down, there is a decrease in revenue, less up-front profit, and the studio becomes less engaged with generating sales.

For books, after paperback, we are seeing the e-books come up. It used to be there was nothing left after paperbacks.

Now we get to the problem of e-books!
And here's the problem: The publisher has no distributor for the e-books. There is no up-front revenue for the publisher. Nobody buys the rights (e.g. No Cable company will license them for On-Demand).

Nobody buys 10,000 copies to stock their shelves.

Nobody handles local marketing, or keeps track of the accounting for each individual sell.

For an e-book, the publisher is directly responsible for not only distributing the books via electronic media, but must now WAIT for the revenue to be generated by each individual sell, and account for each sell. Don't discount the accounting effort it takes when you adjust your business model from hundreds of huge sells per month, to hundreds of thousands of tiny sells per month.

This is not how our economy works. Producers and manufacturers, such as publishers, cannot wait for each individual sell. They cannot manage each sells, or the marketing, or absorb the cost that is traditionally split among thousands of distribution centers. Their model simply is not the same as the distributor. They rely on that up-front capital provided by inventory distribution, and cannot wait a year to be paid for their book sales.

There's the crux, folks.

So what about e-books?
Until we see e-book distributors pop up, which I am sure they will, same as Redbox and Netflix and On-Demand popped up for movie studios, we will continue to see publishers place little if any emphasis on their e-book sales. They will offer the e-book later, after the bulk of their inventory sells are depleted, but will not offer it with a great deal of zest and vigor.

There simply isn't any profit for them in it, and their model is not based on customer service. They are a manufacturer, not a distributor.

So what's the good news?
Just like the hand-held camera and Youtube have allowed independent movie makers to reach new audiences, e-books have opened a new door to readers and independently published authors. Quality will vary, but it already does, even in the print market.

For the print market, we'll see them focus more on non-fiction, educational, and children's books. These have not yet translated well to the e-book market. We'll also see higher-quality print books, since they can now shunt low-quality books directly to e-book distribution.

Traditional publishers may even create sub-departments, where they crank out pulp e-books of moderate quality in the hopes that one or two hit big. It won't cost much to develop the book, and there are plenty of starving writers to prey on.

What's the bad news?
There still isn't a good way of marketing your e-book, other than word-of-mouth. That will be true for independents as well as large publishing houses.

Furthermore, the quality of e-books is already corrupt, as it is rife with unedited, low-quality work. Readers will be challenged to find good books, while healthy authors will face stiff competition to reach said readers. As an e-reader myself, I can say we will be a more and more finicky crowd to please.

What's in the future?
I see independent e-book distributors. I see a shift in what's available in traditional bookstores -- less fiction, more everything else. I see higher quality print, with fewer and bigger superstar authors.

Anyway, what are your thoughts? Do you believe, as I do, that big publishers and paperback distributors will align with the e-market, and find a way to stay in business? What do you see in the future?

- Eric


Wine and Words said...

Yes I think they will align with the e-market. It is the way of the future and you can drive the train or get run over by the caboose. Seems like in the long run, there would be significant money to be made through e-commerce. There is no ink, paper, manufacturing costs. Downloads are still paid for in real life bucks, and for that "priviledge" we have nothing tangible in our hands. I'm going to miss that. No smell of printers ink, no writing in the margins and dog ear-ing pages. A black market will still exist :)

Theresa Milstein said...

I wish I could predict the future--I'd make a lot of $!

Your post makes a lot of sense. With the old model not being able to be applied for ebooks, it does put publishing on shaky ground.