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Market Structure
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From: Charles Bayless <charles.bayless_at_ttmd.com>
Date: Wed, 27 Feb 2013 10:24:44 -0500
In our discussion about books and diversity, in order to try and address complex issues with clarity and simplicity, we often skate over some pretty critical issues that drive the commercial considerations of book production and distribution. This is a huge topic and I want to highlight only a couple of issues: Intra-group heterogeneity and Back list/Front list bifurcation.
Intra-group heterogeneity - In using Group X identities we are usually masking deep divisions within the putative X. There is such thing as a Native American culture and market only to the extent that there is such a thing as a European culture and market. There is something in common at the highest level but the real action is lower down. The book buying tastes and reading habits of a Swede are markedly different than those of a Greek. You wouldn't think to simplistically produce and distribute the same books for both countries simply because they are both European countries. The same is true for Native Americans. There are Navajo, Hopi, Lakota, Inuit, Aleut, Cherokee, etc. all wrapped up under the umbrella rubric of Native American. They each have their own distinct histories, cultures, languages, etc. At some high level they do have some shared experiences as Native Americans just as any person from Europe has a European experience. But what you would sell and how you would sell it varies significantly, j ust as among European countries. So a Native American reading market of 5 million is really an aggregation of some five hundred tribes, the two largest of which (Cherokee and Navajo) constitute about a million people. The issue is that a small market gets much smaller very quickly when you try and serve the particular markets.
The same analysis applies to the fastest growing ethnic group in the US, Hispanics who have grown from 5% of the population in 1960 to 15% in 2010. However, the term Hispanic covers a multitude of races, cultures and distinct histories ranging from the middle class Cuban refugees of the 1960s, to the 1980 Mariel Boatlift, to the Mexican farmer laborer emigrees of the 1980-2000s, to the political and professional refugees of Central and South America seeking political stability and economic security from the 1970s to the present, etc.. All distinct markets. To some extent, the variation among these different groups is as great as that between any one of the groups and the other Group Xs of the US.
The key point is that some seemingly large markets are much smaller than they appear.
Back list/Front list bifurcation - There are three different markets being served by publishers. Front List, Back List, and Out of copyright. The difference is similar to that between exploration drilling, production drilling and field rehabilitation in the oil & gas industry. Exploration drilling (which is hugely expensive) is where you prospectively drill in new sites based on geological information only. You do your best to make accurate estimates but it is not uncommon for only 5-10% of drilled wells to actually produce oil. Production drilling is where you drill a well in a known producing field (again using geological and seismic information). Production drilling has a far higher success rate, usually on the order of 70-90%. Existing fields decline in production over time. You can go back in and redrill the wells and increase production for a period. Very predictable cost structures and predictable rates of return on investment. Exploration drilling is very high risk but with a potentially large payoff
. Production drilling is medium risk/medium payoff. Field rehabilitation is low risk but low pay off. Three radically different segments all in one industry. These dynamics are mirrored in the publishing industry where a first novel by a new writer is high cost and high risk but potentially has a huge payoff. New books by established authors are more predictable but with some still material risk. Old titles by established authors might have a good profile for regenerating sales (ten year anniversary, 25 year anniversary, etc.) with still lower risks and more predictable payoffs. Finally there are the out of copyright books where demand is more predictable, competition higher and payoff more predictable but significantly smaller.
Numbers are hard to come by but my sense is that 25-50% of publisher revenue derives from the backlist (and perhaps a higher percentage of the profit). I think the numbers for retailers are likely more on the order 50-75% of revenue from the backlist. It would be interesting to hear from any librarians as to what the front list/back list split is in circulation numbers.
There are two reasons that this is relevant. The first is that the name of the game is all about managing risk and return: improving the odds of new introductions and managing down the costs of the backlist. Most of our discussion centers around getting publishers to invest more in their riskiest line of business, i.e. new books by new authors. If you are a large enough publisher, this might be feasible. It is always easier when you can spread risks over a larger pool. It is still risky and large corporations by law and by financial self-interest have to focus significant effort on managing risk. I think we fail to take into account just how risky is the proposed solution and how unfeasible it is for medium and smaller publishers.
The second reason that this aspect of market structure is relevant is that it slows the integration of new interests and materials. If you only watch the front list, it seems like the publishing industry is highly responsive to the market. And from a certain perspective it is. If you watch only the back list, it is easy to conclude that the publishing industry is completely unresponsive to new Group Xs.
It is easy, in the hunt for the next big hit that might sell 50,000 copies, to lose sight of the fact that Catcher in the Rye is still selling 100,000 copies a year; a number which very few new titles will achieve in their first year of publication.
So whatever Group X attributes we are focused on now, they are more likely to be reflected in the front list rather than the total sales, where the back list has a significant dilution effect.
Conclusions
Markets are smaller than they seem at first appearance
New titles are far riskier to the financial health of an enterprise than is acknowledged
Charles
Received on Wed 27 Feb 2013 10:24:44 AM CST
Date: Wed, 27 Feb 2013 10:24:44 -0500
In our discussion about books and diversity, in order to try and address complex issues with clarity and simplicity, we often skate over some pretty critical issues that drive the commercial considerations of book production and distribution. This is a huge topic and I want to highlight only a couple of issues: Intra-group heterogeneity and Back list/Front list bifurcation.
Intra-group heterogeneity - In using Group X identities we are usually masking deep divisions within the putative X. There is such thing as a Native American culture and market only to the extent that there is such a thing as a European culture and market. There is something in common at the highest level but the real action is lower down. The book buying tastes and reading habits of a Swede are markedly different than those of a Greek. You wouldn't think to simplistically produce and distribute the same books for both countries simply because they are both European countries. The same is true for Native Americans. There are Navajo, Hopi, Lakota, Inuit, Aleut, Cherokee, etc. all wrapped up under the umbrella rubric of Native American. They each have their own distinct histories, cultures, languages, etc. At some high level they do have some shared experiences as Native Americans just as any person from Europe has a European experience. But what you would sell and how you would sell it varies significantly, j ust as among European countries. So a Native American reading market of 5 million is really an aggregation of some five hundred tribes, the two largest of which (Cherokee and Navajo) constitute about a million people. The issue is that a small market gets much smaller very quickly when you try and serve the particular markets.
The same analysis applies to the fastest growing ethnic group in the US, Hispanics who have grown from 5% of the population in 1960 to 15% in 2010. However, the term Hispanic covers a multitude of races, cultures and distinct histories ranging from the middle class Cuban refugees of the 1960s, to the 1980 Mariel Boatlift, to the Mexican farmer laborer emigrees of the 1980-2000s, to the political and professional refugees of Central and South America seeking political stability and economic security from the 1970s to the present, etc.. All distinct markets. To some extent, the variation among these different groups is as great as that between any one of the groups and the other Group Xs of the US.
The key point is that some seemingly large markets are much smaller than they appear.
Back list/Front list bifurcation - There are three different markets being served by publishers. Front List, Back List, and Out of copyright. The difference is similar to that between exploration drilling, production drilling and field rehabilitation in the oil & gas industry. Exploration drilling (which is hugely expensive) is where you prospectively drill in new sites based on geological information only. You do your best to make accurate estimates but it is not uncommon for only 5-10% of drilled wells to actually produce oil. Production drilling is where you drill a well in a known producing field (again using geological and seismic information). Production drilling has a far higher success rate, usually on the order of 70-90%. Existing fields decline in production over time. You can go back in and redrill the wells and increase production for a period. Very predictable cost structures and predictable rates of return on investment. Exploration drilling is very high risk but with a potentially large payoff
. Production drilling is medium risk/medium payoff. Field rehabilitation is low risk but low pay off. Three radically different segments all in one industry. These dynamics are mirrored in the publishing industry where a first novel by a new writer is high cost and high risk but potentially has a huge payoff. New books by established authors are more predictable but with some still material risk. Old titles by established authors might have a good profile for regenerating sales (ten year anniversary, 25 year anniversary, etc.) with still lower risks and more predictable payoffs. Finally there are the out of copyright books where demand is more predictable, competition higher and payoff more predictable but significantly smaller.
Numbers are hard to come by but my sense is that 25-50% of publisher revenue derives from the backlist (and perhaps a higher percentage of the profit). I think the numbers for retailers are likely more on the order 50-75% of revenue from the backlist. It would be interesting to hear from any librarians as to what the front list/back list split is in circulation numbers.
There are two reasons that this is relevant. The first is that the name of the game is all about managing risk and return: improving the odds of new introductions and managing down the costs of the backlist. Most of our discussion centers around getting publishers to invest more in their riskiest line of business, i.e. new books by new authors. If you are a large enough publisher, this might be feasible. It is always easier when you can spread risks over a larger pool. It is still risky and large corporations by law and by financial self-interest have to focus significant effort on managing risk. I think we fail to take into account just how risky is the proposed solution and how unfeasible it is for medium and smaller publishers.
The second reason that this aspect of market structure is relevant is that it slows the integration of new interests and materials. If you only watch the front list, it seems like the publishing industry is highly responsive to the market. And from a certain perspective it is. If you watch only the back list, it is easy to conclude that the publishing industry is completely unresponsive to new Group Xs.
It is easy, in the hunt for the next big hit that might sell 50,000 copies, to lose sight of the fact that Catcher in the Rye is still selling 100,000 copies a year; a number which very few new titles will achieve in their first year of publication.
So whatever Group X attributes we are focused on now, they are more likely to be reflected in the front list rather than the total sales, where the back list has a significant dilution effect.
Conclusions
Markets are smaller than they seem at first appearance
New titles are far riskier to the financial health of an enterprise than is acknowledged
Charles
Received on Wed 27 Feb 2013 10:24:44 AM CST
