One of the themes at BookExpo 2013 is about scale in publishing and how this concept has and is changing within our industry. I was reminded of this post from July 2010 on that topic:
I joined Macmillan, Inc in 1989 the company was rounding out the decade
nicely having gone from losing over $1mm per week and a share price
less than $2 in 1980 to one sold to Robert Maxwell for 19x earnings and
$92 per share. Application of economies of scale helped build Macmillan
to a $2billion publishing conglomerate where each newly acquired
publishing company was just ‘more beans for the baked bean company’
which was how senior executives referred to their “factory acquisition”
process. In fact, some of the executives, notably CEO Bill Reilly, had
come from industrial manufacturing and had a deep understanding of how
to effectively apply scale economies to operations.
the largest publishing companies were following a similar ‘baked bean’
approach as the industry consolidated: Publishing lists were separated
from their original companies and progressively (sometimes immediately)
overhead expenses were eliminated as the acquired company was absorbed.
At one point, I was tasked with following up on the ROI for a slew of
companies acquired over a two year period. This proved difficult
because their operations had been so effectively integrated into the
parent company that constructing a post-acquisition income statement
proved virtually impossible.
Fast forward 20 years and
the scale economic model is falling apart for trade publishing. So
effective at applying scale to accounting, manufacturing, management,
production and other overhead, it is ironic that in the internet world
everyone now has access to similar scale benefits. Publishing companies
now realize they have achieved scale advantages in the wrong functions.
Scale advantage in editorial, marketing, promotion, and content
management is almost non-existent to the degree that will ensure
competitive advantage, yet these are the functions important to future
success. (As an isolated example, I would argue that authonomy.com by
Harpercollins represents an attempt to build scale into the editorial
We all know seismic change – prevalent
everywhere - has to come to the cost structures of publishing companies.
Squeezed by downward pricing and potential revenue share models that
provide more to authors and contributors, publishers will wonder where
the money is going to come from. The scale model that built companies
like Macmillan, Inc. is irreparably dead to anyone thinking about the
future of publishing. The only way out – and it’s not an easy
suggestion – is to recognize that those functions that used to provide
scale benefits are no longer doing so and need to be carved out. Some
of this has happened in manufacturing where companies like Donnelly and
Williams Lea have taken over the manufacturing and production function
for companies: Those departments no longer exist at the publisher.
Decisions to outsource non-value added functions such as accounting,
distribution and fulfillment and information technology must be made as
the publisher contemplates their future. Once unencumbered, the real
test will be whether publishers can re-work their structures so that
they build scale economies in those functions that do provide value:
Content acquisition, editorial, marketing & promotion and
content licensing and brand building.
There is little
evidence that this is happening or that the realization has set in.
Instead of seeing a publishing company improve their performance over
ten years as Macmillan did in the 1980s, we are likely to see many
examples of the exact opposite over the next ten. Will companies rise
to the challenge or are they so wedded to the old ‘baked bean’ model
that they expect it to go on forever? Clearly, it won’t.