I want to say nothing, but that’s not true. Traditional publishers learned a lot these past few years, and in 2014, started putting their knowledge into action.

Over the next few weeks, I’ll do the traditional media thing, and provide you with my own sort of year in review. All of it will focus on publishing and writing, both indie and traditional, and all of it will be my opinion.

Around the first of December, I started a version of this post. Before that, I’ve been grazing along, writing a more personal post about the things I learned or relearned in 2014, and you’ll see that before the end of the year. I wrote down those items as they came up or as I remembered them.

I hoped to do the same with traditional publishing.

I started with a comment Dean made about a line in a traditional publisher’s quarterly financial report for the third quarter about the importance of copyright. Dean couldn’t remember what financial report the line came from, so I decided to find it–and of course, I couldn’t. Not fast anyway. But the upshot was that I read a mountain of financial reports for traditional publishers, and honestly, they sent chills through me, considering what’s been occurring with publishing contracts.

Over the past year or two, publishing companies have changed their thinking about the industry. (From now on, I will primarily refer to traditional publishing companies as publishers.)

Some of this change has been happening for years, as mergers and acquisitions grew. Some of it has come from the fact that the large companies have finally understood the impact ebooks and online shopping have had on the industry.

Much of the change is in response to 2013’s dismal fall sales, which happened courtesy of the Justice Department’s investigation of six major publishers and Apple for price-fixing. It didn’t matter how that case turned out; the case itself changed business as usual inside publishing.

Business as usual was this: Before that all important Christmas shopping season, publishers consulted with each other about the timing of their blockbusters.

Think of it the way that the movie industry does: When a film that will suck up all the ticket sales of a particular genre (like an Avengers movie) declares it will release in May, other filmmakers in that genre will avoid that weekend. Generally, studios will release a film that they think will appeal to a different type of audience.

This sort of thing is easier to do in film than in books. A movie takes years to produce and finish. The movie studio will reserve its theater space often two years before that film releases. Sometimes a studio will move a film to a different weekend because of another blockbuster, but often because of production troubles. (This happened with one of the Harry Potter films.) You’ll note that the move will be at least six months after the initial release date.

That’s because of all the moving parts it takes to get a film to market.

Booksellers don’t require book publishers to reserve space in the store ahead of time. There aren’t four or six or twelve slots for books in the average bookstore. There are hundreds.

However, it was smarter marketing to make certain that John Grisham’s latest novel would not compete with Scott Turow’s latest novel, on the theory that legal thriller readers wouldn’t pony up $60 the week of the hardcover releases—they would choose which author they liked best, and only pay $30.

So publishers would contact each other about a year before and informally discuss release dates. Weekend 1 (in September) would belong to Turow; Weekend 6 (in November) would belong to Grisham. But…Stephen King was releasing around that time, and he might take some sales from Grisham, so move the Grisham to Weekend 4…and so on and so on.

When the court case started, publishers couldn’t make these informal phone calls. And traditional book production takes a fraction of the time movie production takes. The publishers released their fall catalogues early in the year, and then the orders would occur, and the release dates would be set in stone.

Because there was no consulting in 2013, a disaster set up: Turow, a former juggernaut author, whose legal thrillers were always an event, was releasing his first book in three years. In theory, his sales would have destroyed any other author’s sales in the same genre.

Just like John Grisham’s sales would in their first weekend. Grisham’s books had ceased to be “Events” like Turow’s, but Grisham had a loyal mass following that bought everything. He got his own release week, generally speaking, just like Turow.

Only in 2013, their releases were exactly seven days apart. Turow’s novel came out on October 15, and Grisham’s on October 22. And Grand Central, Turow’s publisher, learned that readers preferred John Grisham by a huge margin.

Even so, neither book sold at the author’s historic high.

No book in that fall sold at an historic high. Factors came together to prevent it. Some of those factors were:

1. Publishers could no longer collude on release dates (or anything else, including price).

2. The rise of independent publishing meant a lot of readers, who would have bought a legal thriller from Turow or Grisham because those two authors were among the few still writing in the genre, got siphoned off. Those readers found other legal thriller writers or backlist novels that had been taken out of print when the legal thriller genre “died.” Indie publishing gave readers what they wanted when they wanted it, and a lot of them abandoned the bestseller they sorta liked for a midlist writer they loved and whose book was now available to them.

3. The utter decimation of the newspaper book review section. When newspapers died, they took their book review sections with them. Surviving newspapers cut the “fat” from their pages, including the book section. (Which is stupid to me, because the book section was a guaranteed source of weekly advertising revenue.) Only a handful of book sections survived, and those were in truncated form.

4. Magazines got rid of book review sections as well. Those that kept the review section, like Vanity Fair, put it in (I kid you not) 9-point type or smaller.

5. The reluctance of the book blogger. Book bloggers with large followings don’t feel the need to review a Big Book just because some publisher said they must do so. In fact, book bloggers prefer to be the source of recommendations for the eclectic reader, not the mass reader.

6. The decline of shelf space in the brick-and-mortar store. In 2013, there were fewer paid placements available in bookstores (up front is paid for, folks, as is that new release table). Readers were learning to shop differently.

7. The rise of the algorithm. Online bookstores would send out targeted marketing e-mails to readers based on previous purchases. Sometime in 2013, online bookstores changed their home pages so that a reader might see only the types of books that interested her. This is changing back in late 2014 because Amazon has realized what a cash cow coop advertising is. Now, when you log onto Amazon or Kobo or Barnes & Noble, you will see a scroll of bestsellers along the top (relatively small) before you see all the “recommended for you” books. But that sales venue is nothing like walking into a store and seeing John Grisham’s latest stacked in piles of twenty everywhere.

There was a lot of gloom and doom throughout the entire traditional industry in 2013 because it was clear to everyone that the old system wasn’t working. The old system, based on velocity and constant push of new product, was actually falling apart.

So traditional publishers did what all businesses do when something isn’t working: they reassessed. They studied financial sheets and looked at two things—where their business lost money and where it earned money.

The publishers had a surprising realization: those backlist titles they threw up on Amazon and one or two other sites because everyone was demanding ebooks? Those damn things were selling and making the company an astonishing amount of money.

There were other benefits to the ebooks as well, which I’ll get to below, but the financial one trumped everything. Even better, digital products are inexpensive for the company to produce compared to actual physical products.

Here’s how Houghton Mifflin Harcourt stated that in their third quarter results:

The increase in product profitability was primarily driven by a $17 million reduction in product cost…

You’ll find little phrases like that one in all the financial reports of the major publishers. They’re just buried in financial speak. (And that’s only one reference to the lower product cost. There are others, buried in different line items. You just have to know how to read these things—which is a lot easier these days, with online accounting dictionaries at all of our fingertips.)

So, ebooks made money without a lot of in-house support, and they had low continual costs. Think about this: to reissue a mass market paperback that was a surprise good seller, the company had to go back to press, then ship the books to a warehouse, anticipate returns, and not see revenue for at least 90 days.

A surprise good-selling ebook has the digital storage costs and the other little fees that the online ebook retailers charge, but there is no printing fee, no shipping fee, no warehousing fees, no returns, and they get paid promptly at 30 days. Oh, my, oh, my, isn’t that lovely for the bottom line?

Add to that the fact that most writers sold the license to their digital rights dirt-cheap. Even if an ebook had the same costs as a print book, the lower royalty rate to the authors, based on net sales, not cover price, would equal a much lower product costs.

Ebooks—at any price—are an astonishing revenue boon to traditional publishers. I say astonishing, because I’m pretty sure that no traditional publisher realized how well these things earned until they reassessed their entire business model.

The protectionism that sparked the price-fixing case from the Justice Department? That desire to make sure no ebooks sold so that customers would only buy hardcovers? That’s so 2012.

Where publishers discovered that they lost money was on marketing and any attempt to push velocity. Ad buys in book publications, doing a ton of up-front promotion to spark interest in a book, pay-for-placement in a brick-and-mortar bookstore, all had very little effect on sales, unlike the past. The marketing costs were high in comparison to the return.

In the past, that return was quick sales that recouped everything. The present is pretty simple: the bestseller numbers have flatlined significantly. In the past, a new release by John Grisham would have sold at least half a million copies in its first week.

Last month, Gray Mountain, Grisham’s 2014 release, sold 122,506 copies in its first week, the highest selling fiction title out of the gate for the entire year. (The closest competitor? Top Secret Twenty-One, the latest Janet Evanovich title, which sold 88,997 copies in its first week. (As reported in the November 14, 2014, Entertainment Weekly Chart Attack [no available link.])

Neither sales figure would have gotten the Evanovich or the Grisham on any chart before the ebook revolution. Those sales figures are extremely low.

I spent much of the fall of 2014 asking serious readers if they heard that this bestselling author or that bestselling author had a new release. Every question I asked was about an author with a fall release, and every person I asked, in my informal sample, said no.

I was particularly shocked to see the anemic promotion for Lee Child’s latest, Personal, which came out on September 2, 2014. Personal is a Jack Reacher novel, and Jack Reacher is a well known character—so well known that Tom Cruise played him in a film—10 months before.

Even an anemic film like Jack Reacher increases book sales astronomically. Generally, publishers trumpet the next book released by the author.

Most of the ads I saw for Personal were group ads, not individual ads. In other words, Personal was displayed with the five other titles that Delacorte wanted to promote that month.

If we needed a sign that ad buys were down across the board in publishing, the Personal ad buy was it.

So…expenses trimmed, income up…rather than dying these past few years, traditional publishers have healthy balance sheets all over again. Except Hachette of course. Those of you who keep asking me my opinion on the Hachette/Amazon thing should use a brain cell or two. Hachette caved within a week of this statement in parent company Lagardere’s third quarter financial report:

In the United States, in a digital market that is at a standstill (slowdown seen since 2013), net sales of e-books were down (28% of net sales for Trade(3) vs. 31% at the end of September 2013), due notably to Amazon’s punitive measures…

The key words in my paragraph above are “parent company.” That loss of revenue was unacceptable, and any parent company would demand that the situation get resolved before year’s end, whatever it took to settle it. As Dean was saying throughout when anyone asked him: what you saw was a battle between two major international corporations over a contract. Nothing more. The sky is not falling—although it could have for Hachette if it suffered any more losses like that. (And if you want to fight over Hachette & Amazon, declaring one or the other evil, do it somewhere else. Those comments won’t get through.)

You learn a lot reading financial statements, and the things I learned made me revise this piece entirely. Every single one of the major traditional publishing companies is revamping its business model, and that revamp is showing up in the financial speak of the quarterly reports.

The biggest change is a seemingly simple one:

Traditional Publishers Have Changed The Way They Regard Books.

In the past, books were widgets, retail product that would be on a shelf for a short period of time and then disappear, only to be replaced by a new widget.

Every now and then a widget would sell well, for reasons unknown to the manufacturer (the publisher), so the manufacturer would keep that widget on the shelf until sales declined at such a rate to make the costs of stocking bookstore shelves unfeasible. Then the widget would move to the warehouse where a store could order if it wanted the widget. Once warehouse sales declined below some set financial point, the company stopped producing the widget.

Or in publishing terms, the book went out of print. Not any more. Now, traditionally published books no longer go out of print.

The main reason is…

Improved Asset Management

Once upon a time, only the big selling novels became assets of the company. Some company reports still reflect this attitude, noting that the megasellers like George R.R. Martin’s Song of Ice and Fire series bring in a disproportionate part of the annual revenue. Often, in a financial report, you’ll see a series like that listed not only in quarterly revenue, but also as an asset of the company.

However, the midlist books and the out-and-out failure titles never got listed as assets of the company. And now, if you dig down deep in the financials, they do.

For almost no cost (under corporate definitions), a book can remain in print as an e-book, and stick around on the corporate books as an asset. An asset has two functions inside a business. The asset is something the firm owns, just like many of you own your house.

In business terms, however, an asset is also something that a corporation controls (or owns) that the corporation believes has a future economic value. A copyright license for a book is just this kind of asset. The book might not sell well now, but for little cost, that book might perform gangbusters in the future.

Think that doesn’t happen? Fads come and go, and along with them, attendant material. When Titanic came out in the 1990s, Dean’s then-agent wanted to know if Dean controlled the rights to the Titanic sf novel he had written because traditional publishing was in a Titanic buying frenzy.

Imagine if that novel had been in print at the time. Whether Dean wanted the book reissued or not (he didn’t, for reasons we won’t discuss here), sales would have increased without him lifting a finger just because the Titanic was in the news.

On traditional publishers’ balance sheets, the asset load grew significantly these past few years. You will find that information in the year-end reports of some companies in 2013. I’ll wager you’ll see even more of that in the year-end reports for 2014 which will appear in January.

But, to publishers, books also remain…

Short-Term Earners

In addition to being assets to traditional publishers, books remain widgets. They have a limited brick-and-mortar shelf life. Their more expensive incarnations—the paper versions—will only exist for a short time.

Traditional publishers hope to make back their entire investment into their widgets—ahem, I mean books—in the first few weeks after release. From then on, the successful book is pure profit. The unsuccessful book takes years to earn back its initial costs. In the past, the unsuccessful book became worthless—something that the publisher was happy to get rid of. Now, the unsuccessful book moves into the asset category, and can have earnings over years and years.

The print version will cease to exist, although it might be brought back if one of those changes I mentioned above happens.

By the way, a book can earn back its costs without earning out its advance. In fact, that’s a lot more common now than it used to be, as contracts pare down the various royalties that the publisher owes the writer. Books often become profitable long before the writer sees a dime in earn-out royalties.

Books have a new(ish) identity to publishers. And that identity is…

Exploitable Content

As I have said repeatedly in the Business Rusch blog, contracts between publishers and writers have gotten draconian. Publishers want to own every right in the property (what writers incorrectly call their book) and writers should only license what the publisher needs to market the book effectively.

Most writers are so happy to sell their books to a publisher that they actually sell their books. (If you don’t understand what I mean by that, you need to learn copyright. Pick up The Copyright Handbook—and read it.) The contracts the writers sign license almost all rights in the book in as close to perpetuity as a publisher can legally manage. (“In perpetuity” is not possible in a valid contract. Contracts must have an end date.)

Why do the publishers want that? Because books are no longer just paper items. They’re apps and games and characters and movies and YouTube videos. They’re greeting cards and Starbucks coffee wisdom and Halloween costumes. They’re merchandise, and so much more.

Why should the writer get the bulk of these proceeds when the publisher needs the revenue? After all, if the publisher licenses all of these rights (and more) in a book property, then the book’s value as an asset grows exponentially.

In the past, publishers had to license the additional merchandising, movie, audiobook, and foreign rights to other companies.

But look at those financial statements folks. Take a peek at this one, which is for Simon & Schuster. Actually, let me correct myself. This financial statement is for CBS Corporation, which owns Simon & Schuster. Note the breakdown of the various arms of the company.

The financial statement divides the revenues of the corporation by segment. The segments are Entertainment, Cable News, Publishing, and Local Broadcasting.

Then the statement divides the revenues by type, which is quite fascinating. Because the listed types are Advertising, Content Licensing and Distribution, and Affiliate and Subscription Fees.

In other words, there are seven major ways that CBS Corporation raises revenues. Two have an impact on writers who have ventured into this corporation through its publishing segment.

The publishing arm puts out the book, and then, depending on the book, the content can be licensed and distributed. Most content in the licensing and distribution mentioned here are film and television related, but not for long.

A comment that CBS CEO Les Moonves made at the UBS 42nd Annual Global Media and Communications Conference on December 9, 2014 should send a shiver through every single writer who publishes with Simon & Schuster. Publisher’s Lunch calls that conference an “investor conference,” and, indeed, the webcast of that presentation show up on CBS’s Investor Relations page.

Moonves said of Simon & Schuster, “Simon & Schuster continues to do a really phenomenal job. Their profits continue to grow every year and we’re really proud of the business…It’s a little gem as a part of our company.”

As CEO, Moonves should know about the various divisions of his corporation. But to call S&S a little gem doesn’t just refer to S&S’s current earnings.

S&S has the most draconian contracts in the business—and has had them for about ten years. They have developed their books into exploitable content long before other publishers ever thought of doing so.

S&S is a little gem that will make CBS Corporation money in a lot of areas, including content licensing and distribution.

Which brings us to the last major way that large conglomerates are thinking about books. They’re…

Profit Centers

In the past, only the big bestselling books became profit centers for their publishers, and then only the books that lent themselves to such exploitation. Many writers had good contracts back in the day, so they kept audio rights and movie rights and translation rights in their own pockets.

But now, because of that whole exploitable content thing above, so many traditional publishers want a percentage of every single imaginable right. And there are more imaginable rights than writers can generally imagine. Look, for example, at this list at the Harry Potter shop: everything from books to wands to clothing to home décor. That doesn’t count the games or the movies or the Wizarding World of Harry Potter.

Such things have happened with Game of Thrones and Lord of the Rings. But it happens with smaller projects too. A lot of popular books that have no movie tie-ins have produced mugs or t-shirts tied to the books themselves.

And as corporations are more than just publishers, they want to own the profit center (book). The reason Moonves called Simon & Schuster a little gem is because S&S has always had a tie-in arm. Fifteen years ago, that arm was designed from the top down.

Or as Wikipedia puts it on the S&S page:

As part of CBS, Simon & Schuster is the primary publisher for books related to various media franchises owned by CBS, such as How I Met Your Mother, Star Trek, and CSI.

Top-down publishing. CBS had big properties, so they decided to use their tiny publishing department to produce merchandise (books) for those properties. I’m sure CBS had other arms that also produced other merchandise.

What has changed is that now corporations like CBS (and News Corp, which owns HarperCollins and Zondervan) want to exploit from the bottom up. So imagine that a writer writes a lovely book that has pieces which might make a good TV show or a nice addition to the YouTube Channel. If the contract between the writer and publisher are written correctly from the point of view of the parent corporation, then the exploitable content becomes a profit center for the corporation with very little creator expense.

In other words, the corporation won’t have to pay six to seven figures to get a TV or film license from the author. The corporation already licensed (or bought!) those rights in the publishing contract, for a fraction of what the writer would normally get.

This is what you’ve heard many of us derisively call Hollywood accounting, because these business practices have been rife in Tinsel Town for generations.

This form of accounting moved to the record industry twenty years ago, and has slowly moved into publishing.

You haven’t heard much about it yet because the bulk of the traditional publishing industry has developed contracts to exploit a book’s content only in the past few years.

Writers haven’t yet realized what they’ve signed. Nor have a lot of this potential cases become lawsuit worthy. Writers have yet to complain about the contracts because writers are still working to fulfill those contracts.

Although you’re hearing whispers. The entire controversy over L.J. Smith who wrote The Vampire Diaries for twenty years is a contract dispute. Smith signed with Alloy Entertainment, a packaging firm. Smith got nothing from the sale of The Vampire Diaries to television, nor does she get anything from all the marketing and merchandising rights. In fact, Alloy Entertainment fired her a few years ago—which was all within the legal boundaries set by the contract.

Packaging firms have existed for decades. The packaging firm owns the rights to the entire creation (the “world”) and the writers are simply contractors with no rights in the work whatsoever.

When traditional publishers can devise contracts that essentially do the same thing, they do. And writers, desperate to be published, signed those damn things.

Signing those publishing contracts is more dangerous now than it was fifteen years ago. Because fifteen years ago, books would go out of print, and then the contract would end.

Now, books don’t go out of print.

I’m waiting for the first big lawsuit from a writer against a publisher, as the writer tries to find a new way out of a contract. Musicians have been filing those lawsuits for years now, and for the most part, getting no traction. It’s their signatures on the dotted line. Not understanding the implications of what you sign is not a good defense in most contract cases.

What did traditional publishing learn in 2014? How to revise their business to make even more money. Traditional publishers will be around for a long time, and writers will continue to sign with them.

But writers need to know what they’re up against.

They’re not signing up for a partnership with a production and distribution company like they had in the past. Mostly, these days, writers are signing with an international entertainment conglomerate that wants to exploit its assets for as long as possible.

And books have moved from widgets to assets on the conglomerate’s financial statements. The contracts—and the hardball that publishers now play—reflect this move.

When writers do business with an international entertainment conglomerate, they should be prepared to walk away from what initially looks like a good deal. Because, in most cases, the writers will lose the right to exploit that property themselves for the life of the copyright.

In 2014, traditional publishers reassessed their businesses and improved them—from the publishers’ point of view.

Traditional writers who go blindly into this world will get screwed worse than they ever have before. Traditional writers who go in with their eyes open might gain some benefits at the expense of a book or two or three.

Generally speaking, the writers who go into traditional publishing are risk-averse. But it would seem to me that the only writers who should go into traditional publishing are writers who appreciate and understand risk.

Because in 2014, the big conglomerates did what big conglomerates do: they reassessed their business and improved it.

Most writers never think to do that with their businesses.

Next in my year in review? What indie writers learned. And then, what I learned (or didn’t learn).

I want to get this done before the end of the year, because I personally hate reading the previous year in review in the new year. I of course left all of this for the last minute.

I have other business musing posts lined up for 2015.

If you want me to continue to muse on business, please forward this or tweet it or consider donating. I don’t get paid for the nonfiction I write, so the donations help. You’ll see the PayPal account listed as White Mist Mountain which is one of my companies.

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“Business Musings: “What Traditional Publishers Learned in 2014,” copyright © 2014 by Kristine Kathryn Rusch.









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