Behind Publishing's Wednesday of the Long Knives

As the publishing industry reels the day after announcements of layoffs by major publishers, you can expect lots of ink to be spilled about the underlying reasons. I doubt if they will drill down to what's really at the heart of these upheavals.

I'm going to ask you to read my comments twice. When you get to the end you'll understand why.

Richard Curtis
The American trade book industry is undergoing the most serious recession in its history, and though it has rebounded from other down cycles in the past, anyone who thinks it will return to boom times is living in a fool's paradise.

Trade book publishing has been in decline since the end of World War II. Industry boosters cite increased sales volume over that period to support the view that all is well, but much of the growth can be attributed to normal population increases and inflation. For the real story, one has but to look at the long roll call of publishers that have been forced to sell themselves to conglomerates, merge with larger publishing houses, or go out of business entirely. I am not speaking about mom-and-pop publishers operating on a shoestring; I'm referring to giants like Simon and Schuster, Doubleday, Bantam, Putnam, Macmillan, Scribner, Penguin, St. Martin's Press, and Harper and Row. Today, we are left with only seven or eight major trade book combines. Presumably, in this publisher-eat-publisher jungle, these survivors are the fittest. But are they any healthier than the weaklings they acquired?

From the viewpoint of literary agents, whose jobs include monitoring the fiscal well-being of publishers, the answer is a resounding no. Most of the agents I have spoken to confirm my observation: The current economic downturn has revealed that just about every major American publisher is hurting. And what they're hurting for is cash.

There's not enough cash in publishing. There never has been, and there never will be. Why? Because the consignment system of selling books is bleeding the publishing industry to death. Try as they might, the smartest people in our field have failed to find a way to make money under an arrangement that makes books returnable to publishers.

Publishing is one of the few industries that sell merchandise on a fully returnable basis. The custom was initiated to overcome booksellers' wariness toward the work of authors who were unfamiliar to them. If the customers didn't buy those books, booksellers had the right to return the merchandise for credit. The practice was eventually extended to all books, whether by new authors or old, and it really took off with the paperback revolution. Paperback publishers discovered that the easiest way to ship their books was through magazine distributors. As most periodicals are monthly, the distributors simply collected unsold books along with unsold magazines at the end of every month.

Perhaps this setup worked a decade or two ago when returns were more modest, but with returns of 50 percent or more as the norm today, it is virtually impossible for a publisher to earn profits in trade books, or at least earn them on a sustained basis. Despite decades of ruinous experience, it still doesn't seem to have sunk into the minds of many publishers that returns are a form of currency. Like any other kind of currency, returns can be manipulated. All bookstore people understand this concept perfectly: When times get tough, stores that don't have cash "spend" their returns, buying new titles with credits on books that aren't moving fast enough in order to keep cash flowing. Publishers, like anybody else, can only live so long on credit—then they start to bleed.

Large houses can afford to hemorrhage longer than small ones because they seem to have more cash. But that's only an illusion: their losses are obscured on the balance sheets of their conglomerate owners. How long will those owners be willing to go on infusing their ailing publishing divisions with cash? As a rule, sick companies get dumped by healthy ones, and in a recession, sick companies get dumped faster. What never fails to amaze me, though, is why anyone would want to buy into an industry founded on such lousy economics. Though statistics are hard to come by because accountants for conglomerates don't always separate the profits of their publishing divisions from those of their other divisions, the average return on investment in trade books seems to be 2 or 3 percent.

I have spent years advocating the abandonment of the consignment system. For one thing, it is a horrifying waste of paper and other resources. For another, it has forced all of us into negative, defensive, and ofttimes bizarre ways of speaking and thinking about books. Nobody talks about how many copies of a book were sold, but rather how many did not get returned. Royalty statements are designed to deceive by the omission of critical information. Returns data are buried in a column called "Cumulative Net Sales," and the concept of holding back royalties against returns is so inflammatory to authors that publishers have built their royalty statements around hiding that information.

Worst of all, the consignment system is the principal cause of hostility between bookstore and publisher, and between publisher and author. Publishers condemn bookstores and chains for their profligate ordering. But why should bookstores restrain themselves? They have, after all, nothing to lose, as they can always invoke the privilege of sending back what they can't sell. To meet the demand of these bloated orders, publishers have no choice but to overprint. Then, when the books fail to move out of the stores, the publishers are compelled to eat huge returns. The only people who prosper from this insane process are the remainder jobbers or the shady characters who illegally sell stripped paperbacks. In their frenzy to keep stores from returning books, publishers are compelled to offer incentives, politely referred to as "slotting allowances," "display fees," and "co-op contributions,'' that border on institutionalized bribery.

Most of the resentment or suspicion that authors and agents feel toward publishers stems from royalty accounting based on returns. Authors, outraged that creative bookkeeping permits publishers to hold excessive royalties in the name of reserves against returns, consider the system fraudulent. Their viewpoint is easy to understand when you remember that returns are a manipulable form of currency. The temptation to manipulate them intensifies in recessionary or inflationary times when publishers seize upon royalty reserves as the most obvious source of cash to relieve their liquidity problems or earn some extra interest. Publishers cannot with impunity stop paying their printers, their landlords, their paper suppliers, or their employees. But by a stroke of the pen, raising the holdback on royalties from, say, 50 percent to 75 percent, a publisher can liberate enough cash to meet the urgent demands of all those other creditors - at the expense of authors. How, then, could authors, suffering liquidity problems of their own, not feel bitter? Nor is their mood improved to see their remaindered books, on which they receive little or no royalties, selling briskly in used-book stores.

Are there solutions to this dilemma? There are, but they all call for radical changes in the way we think about books, sell them, and account to each other for them. For any plan to succeed, it must: (1) allow publishers to print only as many copies as are necessary to fill orders, (2) put distribution on a nonreturnable basis, (3) enable publishers to make a profit, (4) encourage bookshops and chain stores to make money remaindering books on their own premises, and (5) provide authors with honest, easy-to-understand accounting. That's a tall order. Some gratifying attempts have been essayed, but they all failed because they were not radical enough, nor were they adopted on an industry-wide basis.

As a student of publishing history, I'm aware of all the "death-of-publishing" prophecies that have proven false in our time. But I don't think I'm risking much by stating that the publishing industry cannot endure much longer the way it is being run. The need to change our ways is particularly acute in light of revolutionary developments in electronic publishing.

In the coming era of "demand" publishing, we will see direct electronic delivery of text to reader-users without dependence on distributors, or even on paper. The technology for producing portable electronic books containing or accessing whole libraries is now at hand. By the start of the twenty-first century, thanks to computers, Nintendos, and Gameboys, a generation of children completely at ease with electronically delivered literature will make handheld electronic books the device of choice for reading. The awesome memory capacity of CDs, storing scores of volumes on miniature discs, may make bookstores and libraries obsolete. Thanks to the multimedia and interactive features of the new breed of computers, tomorrow's electronic books will entertain readers with audio and video displays that will make traditional books look as crude as cuneiform writing on stone tablets. Gone will be the disgustingly wasteful system of merchandising books, along with the creative bookkeeping that permits publishers to hold authors' money for years. Authors will be credited a royalty for each use of their property, and the purchase of books will be transacted by electronic debiting of consumers' charge accounts.

Until that day comes, we still have an industry to save.

The above essay was written around 1992, and it was drawn from a guest editorial I wrote for Publishers Weekly. If it sounds as if it could have been composed today instead of sixteen years ago, what conclusion can we draw except that publishers have not heeded the call to reform the unworkable business model that occasioned my editorial?

The difference between then and now, however, is, a company structured on a business model in which book purchases are prepaid and scarcely returnable at all (and when they're returned, Amazon makes money on used books as well). Amazon is the incarnation of all that I projected in 1992 and now it is crushing a system that has been cruising for a crushing for decades. Reread my essay again and ponder.

It gives me no pleasure to say I told you so.

Richard Curtis

Copyright (c) 2008 by Richard Curtis

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