Monday, June 14, 2010

RLG (OCLC) Symposium Chicago 2010

A presentation to at the RLG (OCLC) Symposium "The Books have left the Building". In this presentation is a short summary of the state of the US publishing industry and a summary of research conducted for OCLC that addressed publisher's perceptions of their eBook future.

Presentation Comments:

Good Morning and thank you for inviting me to speak today. 

Chart 1: In preparing for this presentation this morning, I happened on an interesting article in Harvard Magazine about how Harvard’s libraries are dealing with change. 

Chart 2: In this article the author addressed some interesting themes including the librarian’s role as curator – which this quote addresses – but perhaps the most interesting theme for me was the notion that neither publishers nor consumers are up to the task of effectively managing the digital migration we find ourselves in at the moment.  As the sheer amount of data and information increases exponentially, the gap in our collective ability to manage the information and data is only going to get wider.

Perhaps though – finally some good news for librarians?

Shaw suggests that librarians retain specific skills that could bridge the gap between generic content where 'everything carries the same weight' and a 'consciously curated and controlled artifact' managed to the benefit of a librarian's constituency.  What that means is the librarian could be around for a while and could be helpful.  And isn’t that what we all want?

Curation is the hot topic of the day.  It is almost like we are all discovering it for the first time – as though the idea of Curation is a new one.  Tech start-ups and private equity investors have begun to lace their presentations with this buzz word but as we are smugly aware Curation is not new and perhaps is something we might actually be good at as the information and content business expands.

Chart 3:  When I speak to groups about the ‘state of the business’ I often present the industries digital sophistication on a spectrum.  My spectrum - which references knowledge, business model and experience is quite wide.  I don’t generally present the evolution of publishing while referencing Curation but in effect Curation has played a significant role in the progressive concentration of publishing segments and content over the past 20 yrs.  Having said that, Curation as practiced in my examples is a bit like taking a mallet to kill an ant and Curation in the next twenty years I expect will be far more nuanced and who knows maybe librarians will play a role.  I think Shaw hopes that is the case.

So, where are publishers in terms of transitioning their businesses from print to online?

Information companies began their migration in the early 1990s when they consolidated content into silos for tax information, legal, financial, medical/health, etc. They continue to innovate by building platforms that support content, provides a mechanism for delivery and the development of customer specific tools and solutions.  By my estimate, they hold a five year lead on the others in terms of their capabilities and sophistication.

Education publishers began their migration in early 2000’s as companies rapidly consolidated; however development in online and eContent really didn’t accelerate until mid decade.  This current rapid investment and experimentation in Education supports the eBook forecast you will see in a moment.

Trade is much further behind the others even though they experimented with aborted eContent initiatives in CDROM in the mid to late 1980s  and early eBooks in the mid-late 1990s.  They continue to proceed slowly and cautiously. Current levels of investment are concentrated at the top of the business and most medium and small publishers are doing nothing with respect to development and innovation with eContent.

What the Harvard article articulates quite well is that while information publishers in the medical and legal segments are relatively sophisticated the wider digital ‘marketplace’ specifically for raw data is advancing so rapidly that even these established players are having a tough time keeping up.

Chart 4: In my presentation today I would like to give you a snap shot of the US market showing revenues and growth trends.  In the second section, I will attempt to provide you with some perspective on what publishers are thinking about as they manage through the transition to digital and in doing so I will reference some research I did for OCLC in the latter part of last year where I interviewed publishers across the business about what they saw as the future of the book.  Lastly, I will briefly propose some predictions which is, of course, always dangerous.

Chart 5: By way of introduction, from a macro perspective, I think we loose sight of the fact that the publishing industry is really no different than any other old line business segment – whether the auto industry, newspapers or broadcast media:  Periodic seismic shifts occur. 

In the case of publishing, our industry tends to see changes at much wider intervals than others – stone chisels, charcoal sticks, movable type, and eventually the Macintosh computer – but my point is all industries face changes and publishing is no different.

Publishing is experiencing changes in how and what is published, how content is delivered to customers, and the speed by which content is updated, revised and re-edited – and this is no less the case with respect to real-time updates that must occur for database and directory content. Technology is now so fundamental to a publisher’s ability to produce and compete that technologists sit at the top levels of many publishing businesses helping to direct the company’s strategy.

Chart 6: In this context of change we also deal with macro economic problems that have made the US publishing market subdued and anxious about the future.  Retrenchment is evidenced in the continued reduction of staff at publishing houses, the reduction of retail operations across the country and the severe reduction in tax collections that impact library and state education budgets.  And that’s only to mention a few of the challenges we face.

Publishers are also confused about how to deal with important partners:  Amazon over e-Books and pricing, students over the cost of textbooks, Google over scanning and display of content and states over educational textbook content.  These issues absorb the attention of individual senior publishing executives, yet the industry as a whole must feel jealous of business such as Amazon, Apple, Google and others which depend on publisher product, don’t produce any of their own and yet post record profit gains.   If those are not enough, I also think trade and education publishers have yet to wake up to the ‘problem’ that is library lending of e-Books and this to will become an additional ‘confusing’ issue.

Chart 7: As I indicated earlier, the US Publishing market is traditionally divided into three segments: Information & Professional, Education and Trade.  Business drivers across these segments can be similar but each retains specific unique drivers critical to their success.

In the trade segment, big authors and celebrity authors are increasingly important (and thus an emphasis) for success.  In information publishing macro-economic factors exert an important influence in defining success.  For example, the global financial crisis has impacted information companies selling solutions to the financial and banking community.  There aren’t as many employees therefore there aren’t as many subscriptions.  In education, federal and state governments exert significant influence over the success of education publishers either by legislation or more directly in the allocation of funds for purchases.

I did want to show you some numbers so, let’s spend a few minutes on some industry data collected by the Book Industry Study Group.  BISG publishes an annual report named Trends that captures key industry statistics.  This document is available for purchase from their website.

Chart 8: Reported revenues look healthy – so despite all the negativity about the state of the business maybe things aren’t so bad after all.  This data was compiled in the last quarter of 2009 and so 2010 is an estimate based on 2009.  The actual 2010 revenues may not be quite this high but will not be significantly different. 

Chart 9: Title output has continued to grow.  The number of titles published by traditional publishers has risen incrementally since 2003 (215K) to 2010 (288K).   This is despite public pronouncements by some of the largest trade publishers over the past few years that they were trimming their publishing lists and becoming more selective.

And while I am not going to speak about the following in this presentation, more explosive growth is depicted in the non-traditional or self-published segment.  And you might argue that this is a more interesting trend given the size of these numbers.  Much of this volume is not monitored in the traditional supply chain.  How much that matters is not clear but it is useful to understand much of this volume increase is not counted in the first chart I presented.   The expansion in self-published content supports one of the themes of Shaw’s article of a rapidly increasing sea of content which we are having trouble navigating.

Chart 10:  The International Digital Publishing Foundation in collaboration with the Association of American Publishers has been tracking eBook sales in trade for several years.  In this chart from the IDPF, we see the acceleration of e-book sales by quarter for the past two years.

E-Books and the transition to eContent has been the focus of attention for all publishing executives in the trade and education space.  In the industry it is generally accepted that trade eBooks still represent less than 5% of all revenues.  But this percentage is volatile and eBooks absorb a disproportionate amount of attention and management time.  This is because the sale of eBooks raises significant issues for publishers about the future of their businesses.  These issues include, pricing, ownership – whether sale or license, distribution, their author contracts, international rights, copyright and many other issues.  Even though digital revenues are small in comparison with legacy businesses the questions are fundamental to the potential success or failure of these businesses as future going concerns.  The importance of these issues dictates that executive management be focused on them.

I mentioned volatility: In the launch of the iPad some publishers were seeing a jump to 30% of a title’s volume migrating to the eBook as a result of the new iPad platform.  The recent sales of Larsson’s third book The Girl Who Kicked the Hornet’s Nest released last week apparently sold over 30% of its volume in ebook format.  But we shouldn’t get carried away as your typical Joe Blogs fiction or Prof Grutz academic title is still likely to be below 5%.

Chart 11: The transition to eContent in education is equally important as it is in trade but the transition in education is running much faster.  This eBook forecast was recently prepared by educational books wholesaler Missouri Book Company.  MBS believes digital textbooks will represent over 18% of all textbook revenues by 2014.  I suspect looking to 2015 the percentage would approach 35%.

Chart 12 & Chart 13: Despite the near hysteria from the press over trade book electronic publishing which is - overall - tiny, electronic publishing is old really old news to education and information publishers.  As if to confirm this point and the forecast on the prior chart, Pearson in their recent financial reports, highlighted the proportion of digital content sold at 31%.  Other publishers such as John Wiley and Wolters Kluwer have made similar pronouncements.

Chart 14:  Those brief charts should give you a general idea of the current publishing environment from a business perspective.  As I mentioned earlier, at the end of last year on behalf of OCLC I interviewed a number of senior publishing executives about their thoughts and preparations for the future.  To clarify, I did not seek opinion from information and database publishers for this particular study.

Chart 15:  My observations were interesting from the stand point that it appears that publishers are dependent on external forces for their success as they transition.  For example, the trade and education success could have more to do with a better e-reader than whether the content meets user expectations in electronic form.  This will not be the case forever but places the publishers at the mercy of silicon valley.

It was clear to me from my interviews that e-Books have not been a catalyst for revolution and reinvention for the trade segment.  Publishers are attempting to apply the same logic for the creation and selling of print titles to eBooks and you see this in pricing and release dates for example.   

Piracy is a major issue – real or imagined - and drives many conversations about eBooks, despite the fact that it is becoming increasingly clear that the casual link between the availability of an eBook and a pirated edition is tenuous and that it is the non-availability of an eBook that may contribute more to piracy.  Most publishers don’t see this.

Chart 16:  Trade is problematic.  What activity there is doesn’t go very deep and is concentrated at the top of the pyramid.  The larger publishers admit to e-Books representing approximately 5% of revenues on average and even this is segmented toward the highly popular authors.  By protecting the 95% of their business that is not electronic they are almost by definition defensive in outlook.

While senior executives may be focused on eBooks and eContent there is much less attention paid to e-Books by mid-level staffers.  What tends to happen – and there is some evidence for this in the reaction to the iPad – is that publishers are bounced from one new idea and technology to the other and operate without a coherent medium to long term strategy that seeks to leverage the opportunity that e-Content and e-Books offers.  I think it is speaks volumes that trade publishers seem to be just as surprised at the eBook sales via the iPad as all of us uninformed lay people.

Most medium and small publishers are really no-where when it comes to understanding how to operate in an e-Content world.  This lack of knowledge and experience has another more insidious impact in that these less informed publishers are particularly reactionary on the negatives with respect to e-Content and in particular to the issue of piracy.

I asked almost every interviewee if they were treating their author contracts and relationships differently today than they were three years ago and all said they were not.  I admit to being baffled by that but they are attempting to change their workflows that reduce the reliance on typewriters and biros.

Chart 17:  Trade & academic reference publishing may offer significant opportunities from the integration of digital workflows and e-publishing. 

Just think of the active links, full text searching, document libraries, etc that can be incorporated into the academic book that can really bring the book alive.  The future is close but hasn’t been invented yet.

But tradition still plays a significant role in the expansion of eBooks in trade reference.  Scholarship is still dependent on a print formula even though much of the research activities that contribute to the reference work will have been conducted on line.  Publishers do recognize the potential that e-Books and digital content enable but there are only a few isolated examples to date – Rice University, U/Tennessee, – for example, and none within a major publishing house.

Chart 18:  Which brings me to education which as a segment has been rapidly digitizing content, building digital workflows and creating ‘born digital’ educational materials for the past five or six years.  A major driver in this effort was the private equity investments in Cengage and Houghton Mifflin Harcourt.

Education publishers find themselves balancing both “born digital” and migrated print workflows.  This will not last forever but does lead to some inefficiency.  As their markets mature, College is potentially more accepting of the migration to electronic in the short term whereas School will be much slower.  The school content approvals process may also limit some of the advantages that digital content enables such as content updating; A negative if materials need to be approved for each ‘version’.  Experiments with E-readers – particularly in the college space -  have largely failed both because of functionality and because of content ownership.  While e-Book content may be cheaper students aren’t able to re-sell the content and depending on the model may loose the content once the semester ends.  They don’t like this.

Education publishers are beginning to think terms of databases and subscriptions rather than books and retail price.  This is a big change and as this develops it could have a significant impact on the economics of educational publishing.

Education publishers are also following the path of information publishers in building content and service platforms that broaden the publishers offering beyond simply content.  Several of the larger publishers now own course and school administration software companies, student assessment products, schools and learning institutions and other similar companies that expand their market.  With a services model for example, publishers are able to offer numerous options from ‘build your own textbook’ functionality to testing and remediation tools.

I expect that within five years educational publishers will have opened their content warehouses to enable academics and students to interact with their content in ways we can only guess at but which will radically change the relationship between publishers, students and faculty.

Chart 19:  Some of my interviewees did offer a perspective on libraries. There’s a divergence of opinion on libraries and we see that in these quotes. 

Publishers think they are important.

Chart 20:  There’s a perception libraries help publishing but no one can ever cite empirical data.  I think it would be helpful if this gap in knowledge were filled.  As more and more content goes on line and is made available to more patrons via remote access, publishers and librarians are going to need some real data to understand the dynamics.  Some publishers told me they don’t want to sell their eBook content to libraries.  For example, no one really knows the characteristics of a library patron who is also a book buyer.  How can we anticipate how the patron’s behavior will change in an online world without research?  How can we guarantee that a heavy book buyer will not transfer their transactions from the bookseller to the library if content is online and available on their iPad?  If they do that, then how should the publisher/library business model change?

Chart 21:  Trade publishers and to some degree education publishers are interested in direct to consumer models.  They have virtually no experience in this which is not to say they can’t learn.  Some publishers even see the library as a potential gateway to the reader community.  Publishers want to build online communities of book readers.  The notion of the solitary reader is not ‘natural’ given the history of story (and advice) telling: Will or how will this relationship with the book change and can libraries and publishers work together in cooperation?

Chart 22: Which brings me to the final segment of my presentation for today which is to present some thoughts and predictions about publishing in the digital age.

Chart 23: Let us first remind ourselves about the publishers’ view of their current environment.  

Chart 24:  Are things really that bad.  By comparison with other media, book publishing looks like it was a winner in 2009.  Last year’s news about Newspapers, magazines and television represented an almost never-ending news cascade of revenue loss, closures and bankruptcies.  Many newspapers have forever lost over 1/3 of their revenues from classified advertising: It will never come back and circulation and display advertising is also on a decline.  Some major magazine titles were down 50% ad revenues during 2009.  What do you do when you lose 50% of your revenue all in one go?  That also doesn’t come back and many brand name magazine titles with long histories closed last year.

While nothing improved over the balance of 2009 for book publishers and senior executives continue to be hesitant to expect much improvement in 2010 the industry may be comparatively resilient.

In the library and education space lower tax collections means reduced spending generally but in the case of education, the Obama administration is committed to funding new education initiatives that should help publishers.

And we didn’t need a bail out.

Chart 25: While each segment of the publishing industry is at a different stage in their evolution they will all continue to deal with and manage significant change.  How these changes manifest themselves is hard to predict but my thoughts are as follows:

Hardest to predict is the information segment which will continue to invest in the content and technology products they are delivering to their clients.  They will continue to integrate content and technology and offer customers more flexibility in how they gain access to these integrated products via software as a service, application providers, outsource partners and embedded content.

Interestingly, the changes in the amount of content to be curated, managed, organized etc may hit this segment hardest and as I said earlier, while this segment is most sophisticated of all publishing segments publishers they will still find it difficult to keep on top of the data explosion.  In order to cope you will start to see publishers open up their platforms so that third parties can build applications on top of the publisher owned data, the use of taxonomies, and ontology’s will be increasingly important and probably the employment of content curators – perhaps librarians – or more accurately one part curator one part mentor who will curate and guide users in the use of the technology available to them.

Education publishers are following the lead of the information publishers in expanding their value chain to service more educational segments and in the process they become solutions providers.  The education publishers will also increasingly offer custom content creation for consumers/students, administrators, academics and state systems.  The education segment will rapidly catch up to the level of sophistication that the information publishers continue to exhibit.

Trade will generate the most attention but change will be slow.   All major publishers are currently reevaluating their value chain and redefining what it means to be a publisher.  For example, they are changing their workflows to rely more on xml and changing their author contracts.  How their activities evolve will be interesting to watch.  Trade publishers will also continue to experiment with direct to consumer models and will develop subscription products.

Chart 26:  eBooks and eContent will naturally continue to garner significant attention.   I think in the future we will look on 2009 and the time when eBooks really became a legitimate consumer product.  And with the release of the iPad we may be witnessing a broadening of the online retail options available for publishers and consumers.  This is a good thing.

A major development to watch during 2010 will be the introduction of Google Editions and the Apple Bookstore.  My expectation is that these products will raise awareness of how “books in the cloud” will impact traditional ideas of ownership, rights and copyright – perhaps this is more the case with Google than Apple but this framework is coming to all e-tailers. 

As e-Books and e-Content evolve they will become more recognizable as just another content format option similar to hardcover, paperback and audio.  A more interesting development will be the atomization of content as publishers allow their products to be sold in chunks, segments and parts as defined by their customers. 

It is my own personal belief that print will never go away and by ‘never’ I mean somewhere between 100-1,000 yrs.  The print option will become a far more functional format for consumers than it is today.  I think you will be able to have the print design of your choice for any title ever published in short order.

Chart 27: In summarizing my last section of this presentation I would close with the following statements:

·      Publishing and technology will become synonymous if it isn’t already.
·      Those publishers who are slow in adopting what are rapidly becoming standard practices in our industry – the use of xml for example - will be overtaken rapidly by more adventurous publishers.
·      The “platform” workflow approach which is all about addressing customer needs and requirements will expand in education and see some development in trade
·      The biggest and most innovative changes will be seen in education publishing over the next five years as new born digital content is delivered to students and we see proportional revenues exceed 30% by 2016.

Chart 28: Finally,

Curation maybe the buzz word of the hour but as more and more data and information is produced we will want some mechanism for deciphering and navigation.  Information overload is already a significant drain on the economy by various studies.  If the situation is growing exponentially worse our information economy may not be a productive one.

In closing, to return to one of Shaw’s themes, the idea that current publishers are finding it difficult to cope may bode well for libraries although change is needed there but that’s topic for another time.  In the meantime, if you haven’t read Shaw’s article I recommend it.

Chart 29: Thank you for having me.

1 comment:

Michael Roberts said...

I found this presentation very interesting to watch. Job well done.