On Publishers

A simple proposition: digitization of a media form changes everything. This is less a proposition about digitization itself then about the fall of a business model built on making and selling copies. There are two dirty secrets to be considered. The first is that the business model of purveyors of content wasn’t to sell content, it was to sell copies. Who cares what’s in the container, so long as you can sell lots of containers. This is important to realize because the success of content purveyors hinged on two factors – first, thanks to economies of scale, they could produce high quality copies for cheaper than a smaller enterprise, or an individual, and second, that the content and container were inseparable. The former made the enterprise profitable, the latter guaranteed sustained profitability. Containers had cost. Containers had form. Containers had value.

Once content goes digital, both of those factors cease to have meaning. The ability to make copies is only limited by the penetration of personal computers into the consumer marketplace. Which effectively means that today almost anyone in the United States can make a copy of digital content at no additional cost. And the Net means the content, freed from physical form, can be moved between points at no cost. The content can be divorced from the container. And this is the real problem: consumers no longer have to buy a container. This is why DMCA anti-circumvention measures are so dear to purveyors. It allows them to cling to the container-based business model in a world without containers.

And this leads to the second dirty secret. Once the value of the content can be segregated from the value of the container, you can potentially determine the actual value of the intellectual property itself. This is a tricky question, and one I’d like to return to in a moment.

The recording companies put their content in digital format onto a plastic container. The content was freed. Books however have been a stubborn exception, for the simple reason that the printed word’s relationship to its container is very different than the relationship between audio and video and their physical containers. The printed word’s container has been for millennia the means for consuming the content, and to this day, arguably remains the preferred mean for consuming it. This is what has delayed the day of reckoning for book publishers.

Compare: at least according to the RIAA’s own numbers, the rents it has been able to exact have dramatically fallen ever since content could be freed from container and distributed by electronic current and light waves. In 2001, 980 million physical “units” were sold for 13.6 billion dollars. In 2009, 309 million physical “units” and 1.236 billion digital “units” were sold for a grand total of 7.6 billion dollars. Meanwhile, the AAP announced that though year-over-year revenues from book sales had fallen in 2009, the industry had seen compound annual growth of 1.1% over the preceding 7 years. Not bad.

But the day of reckoning is here. Books are being published digitally, and older titles are being digitized. The content is being divorced from the container. Publishers are scared beyond belief of “piracy.” They understand: once they go digital, a business model built on “printing” copies will be challenged. They will try to hold the center in the same way the RIAA and MPAA did. With DRM and lawyers. They should realize the bell is tolling.

Now I’d like to return to dirty secret number two, the inherent value of IP. The publishers recently fought a very short and very public war with Amazon.com over its policy of capping eBook prices at 9.99. With the help of leverage provided by Apple, the publishers succeeded in ousting the policy and earned the right to price eBooks to their hearts content. The result? I can buy a physical copy of Prof. Neal Natanel’s “Copyright’s Paradox” for $15.80. The Kindle edition is $14.22. At that price, I, and I am willing to bet, many others, would prefer to buy a physical copy I can write in, dog-ear, lend, and re-sell, among other things. And here’s the insight: even though the printed word content is exactly the same, I’m willing pay for the container. And there’s the dirty secret revealed: consumers allocate a great bulk of the value of a book to the container, not the IP.

This, of course, is the horrible truth that publishers can’t live with. When a study showed that 27-28% of “avid readers” did not want to pay more than 9.99 for an eBook, an industry businessman declared that they had been “converted” to believe that eBooks should be cheap, as if Amazon had subtly conditioned them. Only one problem with that theory – people aren’t even paying 9.99 for eBooks. Currently, 61 of the 100 bestselling titles on the Kindle are priced at all of $0. A major factor that admittedly distorts my point is that there is a barrier to entry to the Kindle market at the moment – you have to already paid good money up-front for a reader device to make use of the catalog. Nevertheless, the fact remains that eBooks priced even at 9.99, let alone higher, aren’t really selling. It just might be that consumers don’t place value to the tune of 15-20 dollars a copy on the printed word divorced from physical container.

Based on the relatively rosy sales numbers earlier, and my own stated preference for the physical container in most situations, why the fear among publishers? Because mass digitization of the content has already happened (hat tip: Google). In the name of progress, accessibility, and superior search results, the printed word has been freed from its containers en masse. And this is without even considering the consequences of easy lawful digitization by individuals. Costless copies can be made, and shared, and the potential reader will likely soon have the option of finding the content sans container on the internet. That’s the nightmare. When the economic raison d’être of the Publishing House – the ability to print, store, and ship physical copies on a large scale at reduced cost – becomes irrelevant, what’s the future of the Publisher?

Like other content purveyors, the Publishers have another business that’s not quite as easy to quantify and commoditize as the making and selling of containers. What value does a publisher add beyond what an author has already done? The service of a skilled editor is central (as a recent self-serving editorial attempted to remind). Publishers also provide publicity. And they create the form of the content.

That’s the future model. Small collaborative start-ups, offering fixed fee editing, design and publicity services to unknown authors, and contingency fee (i.e. based on shared royalties) services to more established authors. The idea of intellectual “property development” is already being embraced by some of the new start-ups, e.g. ORIM, which attempts to bring together print and film experience to develop works as media properties. Just what exactly a new slimmer business model will look like is something that can be further developed in another paper by someone with a bit more insight into the industry.