Tuesday, July 13, 2010

The Baked Beans Are Off

When 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.

All 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 process).

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.


Scott Swenson said...

Nice post, Michael. I agree with your idea that publishers face pressure to reduce cost, perhaps by outsourcing, those business activities in which they don't have a unique value to add. The question on my mind is, in a future of digitally transferable content, in which consumers can consume books electronically or by having a run-length of one book printed, what unique value-adds will still remaind in publishers control? In a webbed world, I wonder if publishers will be able to prevent disintermediation of their core activities of content and author development.

MC said...

Well, I think that’s where the challenge lies for publishers. Currently, what they do in those activities are not well understood and they are not ‘productized’ which implies a few things but one of them is that they have some kind of methodology for identifying the good stuff that people want to read that sets them apart from joepublisher.com. I think the ‘curation’ role and the ‘mentoring’ they can offer publishers (this is my Baked Beans, Curator and Docent, and Digital Concierge posts) do represent potential value add for publishers but they need to do some work to leverage these potential skills. Not only is it not obvious how they would do this it isn't going to be easy either.

Mayowa said...

Another way to look at this is publishers expending significant resources to directly influence bottom line (acquisitions, expense reduction etc.) instead of expending resources to increase value.

Great post

Harry Bingham said...

I'm not sure you've left the baked bean model behind in your own thinking. Why emphasise scale economies in (say) editorial? There are other ways of building and maintaining competitive advantage - and it's not at all obvious that editorial is about scale. Or marketing. Or content acquisition. Or most of the things that lie at the heart of publishing.

That's not to say that publishers couldn't make some interesting changes to the way they view these things, but the old industrial approach won't bring the right perspective.

Ed Renehan said...

Two thoughts occur. First, the traditional strengths of large traditional publishers (cost economies of large print runs, efficiency in warehousing and clout in distribution, etc.) mean less and less (in fact represent a negative of expensive and antiquated overhead) as eBooks increase in percentage of sales and the Internet increases re: conduit for percentage of sales. Secondly, the leveling of the playing field that occurs with the evolution of eBooks and Internet delivery means that increasingly the most vital capital any publisher, "large" or "small," will have going forward is intellectual capital: editorial acquisitions/development expertise, publicity expertise, etc. Anyway, those are my "take-aways."

Eugene G. Schwartz said...

Excellent insight -- I would take it further and suggest that production, operations and distribution are vestigial to the future function of the publisher: author support, content development sand curation and marketing. All the rest will be outsource. We will see the return to born again on-line hybrid headquartered and distributed companies returning the editorial distinction that was lost as earlier imprints became nameplates bonded to the conference room walls and Book Expo displays of the conglomerates of today. It is happening as we write. It is a healthy evolution offering a rewarding new future for book people as did the models of the past.

Gene Schwartz

Victoria Strauss said...

I think this post provides a good nutshell summary of the damage that conglomeration has done to the publishing industry. I also think we would have gotten to this point even without the digital revolution--albeit more slowly--because at a certain point, there are no more beans, and pumping out more and more books in a desperate search for the spaghetti strands that will stick to the wall doesn't work either.

If the big publishers could de-conglomerate, shrink their lists (really shrink them, not just pretend to), and abandon the attempt to squeeze corporate-style profits from a basically low-profit business, they might be better able to focus on the core functions you identify. I'm not holding my breath.