The Baked Beans Are Off - Ideas on What Scale Means (And reference to Simon & Schuster/Penguin Random House)

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:


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.

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.

Brands to Publish - Repost

It's Friday which means another regurgitation from several years back. This one originally published on January 13, 2007:

Nancy Drew has always held a fascination for me, not because I clamor for a good girlie mystery but because of how The Nancy Drew series evolved. Established by Edward Stratemeyer, The Drew books were written by a number of ‘house’ writers (Mildred Benson) and the books were never dependent upon one author for their success. While the publisher of the titles was little recognized, the Drew series grew to become a strong branded product line and, as such, represents a model today's publishers may want to emulate. Corporate branding exercises little impact in the publishing world: We all know this and, while some publishers have tried to create brand strength (i.e., Paramount Publishing), success has been sparse and probably – in truth - not aggressively sought after.

There are exceptions. I used to start my Intro to Publishing courses at Price Waterhouse by asking the group to name a publisher. I stopped doing this when a partner once popped up and said HARLEQUIN! While some consumers might be able to identify Harlequin or Hungry Minds or Fodors, they would be hard-pressed to cite HarperCollins or Simon & Schuster with any relevance. Consumers have little emotive connection with publishing trademarks (a fundamental facet of brand awareness) and publishers are unlikely to ever achieve this connection with consumers. So, in an age in which the author transcends the publisher (Patterson, Grisham, Ludlum, Courtnay) what is a publisher to do? Investing in a branding campaign would be expensive and ultimately pointless, but embarking on a strategy similar to that which produced the Drew books might be more constructive.

My extrapolation of the Drew example led me to wonder why publishers don’t establish their own character-based brands. More publishers will do what Nelson has done and drop imprints, but will they also start to develop their own character-based franchises? Clearly, it is hard to ‘bottle’ what makes John Grisham a popular writer, but there are examples where existing characters have been extended in new ways. For example, there is a cottage industry of TV soap-opera lovers who create stories, novelizations and back-stories for the characters that appear in the TV soap operas. George Macdonald Frasier took a minor character out of Tom Brown’s School Days and created The Flashman series of satirical historical novels. The book packager Alloy Entertainment (which got caught up in a plagiarism charge last year) also operates a Nancy Drew model. There must be many others.

Publishers don’t have to look far to see how powerful character-based publishing could be. The comic book industry has been doing this for 50 years. In this industry the corporate brands (Marvel, DC Comics, etc.) have benefited from some of the reflected brand indentity that characters such as Superman, Spiderman, Aquaman and others have created in the minds and behavior of consumers. In book publishing, the opportunities to create character franchises are there for the asking. James Patterson has embarked on developing an author/character franchise and, if publishers were smart, they would be thinking about creating contracts that gave them the ability to broadly leverage the characters that authors create. This would include (with the author's permission) ghost-written books and stories of both the main characters and development of derivative story lines out of the books (as in the Flashman example). The opportunity to expand the content output and publish to a ‘template’ would generate higher revenues for publisher and author, stable consistent output and content consumers could enjoy.

The above scenario still accords some level of risk for publishers that the ‘powerful’ author may go off on his or her own. Given the examples in the music industry of late, some have suggested that major authors will do what Radiohead has done and walk away from the traditional publishing model. Some may, but it will hardly be an avalanche and this threat is no worse for a publisher than losing an established author to a rival house. The bigger question is how publishers can maintain a consistent funnel of marketable branded content. I believe publishers should be attempting to develop their own proprietary content franchises by building character properties in the same way the Nancy Drew series was created. There are several ways to develop this: Firstly, publishers can simply buy out an authors work so that they own it in total and can leverage it anyway they want. Secondly, they can license characters from other media: Who wouldn’t want to read a hard-boiled procedural featuring Law & Order’s Lennie Brisco, for example? As publishers begin to travel down this road, they could evolve into character based enterprises similar to Disney and Marvel. This, in turn, would make them less susceptible to the whims of authors and the corresponding limitations of their contracts.

Harpercollins is owned by NewsCorp which owns Fox. Assume that Fox owns the character "Dr. House"; why don’t you see a series of House mysteries written to a formula by ‘house’ (sorry) authors whose job it is to churn these out every two weeks? And there is no need to limit the books to Dr House; any of the characters in the show should be fair game. Publishers who focus on their publishing brands have things backwards: They should see things from the consumer's point of view and that view is more than likely focused on either an author or a character. Build the product pipeline up with a character based publishing approach and the publisher may grow in the ascendancy.

Obviously, authors are a critical component to a publishing house’s viability but as distribution flattens, barriers to entry drop and generally the industry changes. Publishers need to reassess their content-acquisition strategies to ensure they have access to revenue-producing assets that will remain with them for an extended period of time. Perhaps the Drew model will become more widespread.