Monday, January 14, 2013

The Death of the Middle Man - Predictions for 2013

FDR, WSC and Middle Man - Mayfair 2009
It seems to some that we’ve entered a period of stasis in the ongoing transformation of the publishing industry.  This time last year, I noted that the routine operations of many publishers had fully realized the transition to electronic content and absorbed its implications.  So perhaps the last twelve months have been about catching our collective breath. But anyone who thinks the big changes are behind us is probably fooling himself, and may be lulling himself into catastrophic inaction.

The harbingers of dislocation are easy to see . . . if you know where to look.  In the second half of 2012, we saw a slowdown in the growth rate of eBook unit sales; indications of a possibly significant substitution of tablets for eBook readers; a major strategic publishing merger destined to create a trade publishing goliath; and the sale of one of the big three education companies.  Any one of these developments occurring independently could have been analyzed at length but, taken together, they suggest to me that more-- rather than fewer-- changes are on their way.

The expectation that the big trade houses would consolidate has been going around for at least five years: in fact, it may be more surprising that the Random House/Penguin deal didn’t happen sooner.  Now that it has, it’s a foregone conclusion that there will be another trade merger announced in the next few months, involving some combination of Harpercollins, Simon & Schuster and Hachette.  Perhaps all three will combine and, if so, that deal would equal the one announced last year in scale and significance. But that’s probably unlikely.  One publisher will almost certainly end up the “odd man out” and it will be interesting to see which it is and what they do next. 

On the education front, there has been widespread speculation that some merger of Cengage and McGraw-Hill Education will take place this year, since the two companies may end up with a common owner.  In the short term, there may not be a full combination but some trading of assets may take place immediately to rationalize the respective businesses with deeper integration to come, perhaps, in 2014-5. 

In education more broadly, all education content companies (other than Pearson) are only at the beginning of their transition from content providers to embedded content and services providers.  Professional information publishers provide content and services at the point of need and education publishers will be doing the same thing in the not-too-distant future.    At CES this week, McGraw-Hill made some interesting announcements about product development investments they have been making which presage how this “services approach” may take shape.

To segue slightly, the justification for a merger is often presented as an opportunity to save cost, apply economies of scale and/or gain access to a new market.   At this point, expense and efficiency gains are more likely to be the primary drivers in both the McGraw-Hill and Random House Penguin cases.   Each publisher anticipates significantly reducing costs in headcount, facilities, distribution and other areas in order to deliver the same total quantity of titles.   They need to undertake this effort because the publishing value chain is compacting, making it easy for content producers/authors to reach consumers directly which, in turn, is also changing the financial model on which publishing is based.   The functional areas where publishers added margin in order to make a profit – overhead, distribution, marketing & sales--are becoming less important (though not unimportant) when authors and contributors can reach their market directly.   The implications of these changes for publishing houses have been clear for many years but addressing how their businesses must change to cope with them is nowhere near complete in the larger houses.  Smaller, more nimble companies like Hay House and SourceBooks have travelled much further down this path.

Education publishing is seeing similar changes but the process of dealing with them will be different.  I expect we will see an aggregation model emerge in education, where content ‘platforms’ deliver content and services on a per-user basis.   As I’ve mentioned before, this model is already in operation. Academic librarians and universities will be offered an extensive database of educational material from which faculty can choose the material – probably pre-selected, topic-driven packages – best suited to their classes.   Platform providers such as Amazon, Blackboard, Pearson and EBSCO may soon be the only efficient way for publishers wanting to sell content (or access to their content) to reach students.    The platform providers will negotiate distribution agreements with all other content providers and may compete against each other to offer the best combination of content. But a more likely and important point of differentiation will be the unique services and level of integration they can provide faculty, administrators and students.  Instead of Pearson and EBSCO, think Reuters and Bloomberg . And instead of profit models based on revenue per book, think per head or per desk.  (This model may begin to undermine the argument for DRM in education.)

A very positive byproduct of this change in education will be a complete integration of library resources, institutional resources and consortia buying/negotiation that will allow better alignment with objectives for student success.  It seems odd (to me) that educational content components, as they are currently supplied to students and faculty on campuses, often stand independently of each source and can only be ‘integrated’ through a manual, rudimentary process.   And it’s even more odd when you consider that libraries have long been licensing tools and services from EBSCO and Serials Solutions which provide deep integration of and access to the databases and content the academic library licenses.   It will only be a matter of time before pan-university content assets and access are brought together.

Ultimately, 2013 may bring more significant change in the trade and educational landscape than we’ve seen in many recent years.   While there will be a lot of focus on the big trade merger and its constituents, the industry’s other players will have to fight aggressively not to lose any advantage—we all recognize that “bigger is better” when it comes to applying economies of scale in a business whose underlying business model is changing radically.   In education, we may be paying attention to McGraw-Hill and Cengage but Pearson, as the market leader, is likely to embark on even more aggressive strategies this year--under its new CEO, and with the divestiture of Penguin and possible sale of the FT Group, the company has forcefully declared education to be its focus.

Opportunities for innovators will continue to emerge, as one would expect in a rapidly changing market.  However, many of the niche or narrow solutions currently on offer--whether they be assessment , content-delivery  or search tools-- are likely to ‘run out of market-space’ as these solutions become embedded in, and offered as an attribute of, the platform solution.   I see opportunity in the delivery of solutions that help specific users – say, university faculty – take full advantage of the integration of content and services that will occur—for instance, on campus-- since many user groups may need to change the way they conduct their usual activities.  The outcome of these work changes will be to produce more productivity and better solutions, but getting there will require ‘intelligent agents’ to facilitate—to help assemble content,  training programs, workflow and productivity tools and similar applications to rewire their work environments.  In education, this requirement may give platforms like Blackboard and Desire2Learn an advantage, given their installed base on campus.

While change often produces anxiety, I see dynamism in the book (and “content”) industry that is exciting and invigorating.  There will be many big changes in 2013 but in contrast to the most recent past where publishers were buffeted by macroeconomic changes, I expect these changes to reflect the elements of a positive shift in the way publishing companies operate and consumers – especially in education – consume content.   We're going to end 2013 thinking completely differently about this industry.

Some other trends I see emerging during 2013:

  • There will be more experimentation with subscription programs, possibly similar to the old book club model, with curated collections and incentives (such as free eBook readers).  These could also be combined with social network capabilities to allow reading group subscription models and social networking.   For example, these could be ‘self-defined’ groups: A reading group could set themselves up and choose from a variety of subscription models that allow their group to read a specific number of books, use a unique set of social tools and pay by subscription rather than per book.
  • A Chinese- or Middle-East- based publisher will acquire a major, brand-name media company.  CurrentTV notwithstanding, this will be in information/professional or education.
  • “Self-publishing” will see huge international growth as Asian and Latin American markets develop.
  • The unlucky leftover of the three trade houses in play will be immediately acquired by Amazon (just wanted to see if you read this far).
  • There will be some consolidation in the eBook provider market.
  • The Apple bookstore will be re-launched and will end 2013 poised to surpass the Nook and move into second place behind the Kindle.
  • Similar to what takes place in gaming, innovative publishers will begin to engage readers in new book and content ideas even before the book is ‘completed’.   In game development, it isn’t unusual for games to be released with only the first three out of 10 game levels completed--why build the whole product if no one wants to play?  Book and content producers may try to adopt and adapt this model for their new product development.
  • Manchester United will win the English Premier League title.


Jane Wightwick said...

Great reading, Michael.

I really hope Apple does beef up its iBookstore since the Kindle is still very restricted in terms of interactivity.

But for sure you're right about Man U! (Just wanted to show you I'd read all the way to the end.)


Mitchell Davis said...

Spurs are coming for the Red Devils....

Peter Donoughue said...

Hi Michael

I read this when you first posted it over a month ago and thought it very interesting and insightful. A month later I've read it again - very carefully! - and I can't help but think you've really nailed it when it comes to he future of educational and scholarly publishing.

The integration of these two long-separate businesses or 'divisions' within large publishing corporations seems inevitable to me. Maybe I'm going out on a limb here but it wouldn't surprise me in the least if Pearson made a play for Wiley in the near future - maybe after they disposed of the FT.

Keep commenting on this sector of the industry please. You are a valuable independent voice.