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.
