Monday, February 16, 2009

Plastics and Publishing

The commoditization of publishing due to the convergence of trade publishing and other forms of entertainment in a digital age is just but one nail in the coffin of the industry. Even non-trade segments of the industry, such as professional and educational publishing, are struggling with issues of digital delivery, and they have also been caught up in the same financial contagion sweeping Wall Street. These publishers have reacted by cutting their lists, reducing staff, and delaying the signing of new contracts and product development, the same kind of short-term thinking prevalent in American business.

The publishing industry seems to be at an inflection point, with the “trade” part shrinking, fighting all other forms of entertainment proliferating on line, via the Ipod, even the cell phone, cable TV, Netflix, etc. and, now, the emergence of Amazon as a publisher in its own right via its Kindle e-book reader, and educational publishing changing slower than it needs to in order to make the Web more of an opportunity than a threat. Somewhere between the space of the large media publishing organization and the small on demand publisher there would seem to be an opportunity for the strong independent publisher.

Here a just some of the recent developments to consider:

▪ HarperCollins, Houghton Mifflin Harcourt, Penguin Group, Random House and Simon & Schuster have all announced salary freezes or layoffs, or both.

▪ As of October book sales fell 7 percent compared with the same period the previous year.

▪ Houghton Mifflin Harcourt has put a freeze on acquiring most new titles for its trade division while HarperCollins has closed its nonfiction division.

▪ Even the venerable Oxford University Press, the largest university press, laid off 60 people from its US operation, almost a tenth of its staff.

▪ Amazon has ramped up the manufacturing of a new version of its Kindle reader and acquired a new work by Stephen King that will be published exclusively (initially at least) on the Kindle.

The last event is particularly significant. Amazon’s first version is estimated to have sold 500,000 copies. Kindle 2.0 is sleeker, easier to use and even will read the text aloud, still another issue for publishers. While intellectual content is now routinely delivered on the Web, mass-market fiction to date has been the exclusive stronghold of the printed book and therefore the publishing industry. Now best-selling authors can bypass the publisher.

But many publishers are also exposed to the subrogation of internal financing to private equity and the leveraged buyout. By 2006 private equity firms were flocking to the industry:

A former colleague of mine wrote me: “I’ve always been jealous of those of you who were in publishing during the days when it was different from other corporations. I've become quite disillusioned with the business as a whole, basically because it seems every other day you hear that some great long-time member of the publishing community is being pushed out, and someone who was the CEO of a deodorant company or something is coming in to run things. Next thing you know, that company goes under.”

But mergers and acquisitions and the pursuit of the holy grail of synergy are not new. I was involved in several during my career. The most ludicrous one was early in my publishing days. A small publicly owned conglomerate owned the company I worked for at the time. This firm also had a consumer plastics company. The accountants discovered the "process" of making consumer plastic products was similar to books as you make a master (camera ready copy for photo offset or a mold for plastic products) and from the master you make duplicates. Perfect accounting synergy as you capitalize the cost of the master and write it off during the lifespan of the product. So, we became part of the "Plastics and Publishing" division and in their 1971 annual report our books were displayed along side plastic hangers, dishes, and jewelry cases!

And, publishers managed during other dire economic times. There were serious downturns in the mid 1970’s when the prime rate rose for the first time to double digits, in the early 1980s when Paul Volker ratcheted interest rates to unprecedented levels in response to the CPI reaching almost 15 percent, and a recession in 1991 that resembled the present one (although not as severe) as it was a liquidity crisis. At that time the excesses of the 1980s were in the process of self-correcting. Individuals and state and local governments who leveraged their finances found they were without the funds to even carry on day-to-day operations. Many of these loans were underwritten by real estate values that had simply disappeared.

Today’s debt has now been magnified by a huge multiple thanks to exotic financial instruments, resulting in an even more serious liquidity crisis. My mantra was a publisher should be able to operate “out of a tent,” making the investment in talented people and buying services rather than investing capital in plant and equipment, or, even worse, in unrealistic print runs and pricing, everything to keep financing costs to the minimum. Leveraged finance and publishing are a bad mix.

Long-term thinking is needed in the industry. Or, as another colleague of mine noted: “These publishers are like a group in the desert that decides to camp in place and stop expending energy so their limited water will keep them alive longer. By this strategy they will live a little longer but die they surely will.” This is the time for stronger independent publishers to expand their lists while leveraged corporate behemoths are contracting, if necessary practicing attrition rather than layoffs, seeking new authors while competitors caught in the financial mess are not publishing them. By swimming against the tide, rethinking their role in a digital world, independent publishers can help bring the publishing industry back from stagnation. “Camping in place” is not an option.