Tuesday, September 01, 2009

Digital size Doesn't Matter

We read today in the FT that Arnaud Nourry, CEO of Hachette Livre, believes that publishers need to further consolidate if they are going to ensure that they have a viable business model with which to negotiate with the new deep pockets of the likes of Google, Amazon, Sony, Apple.

We sympathize with those big six publishers whose model is built on ‘size matters’ and leveraging the economies of scale and scope to grow market, revenues and of course profit. After all it’s what physical supply chain management is all about. But we question whether it is valid in a digital world or in one that supports both physical and digital. What many are discovering today is that rather than being big fish in a little pond, they are becoming little fish in an virtual ocean.

Can any publisher really impose a business model on the likes of Google? Can publisher size really stop Amazon in its tracks? Does Apple even understand the economics that underpin publishing today? The likes of Sony have already said openly that ebook prices must fall – after all they have to sell more devices and cheap product means volume and demand. These players have different drivers and models.

Book publishing is not one industry but several that have been joined together by a common format – the book. However, digitization starts to highlight the differences between these various sectors and although economies of scale and scope still exist within the larger publishers this value is now shifting upstream and the downstream business is becoming commodity and being taken out of their control.

The second interesting dynamic is that publishing has always been a many to many supply chain where the title may have a unique source. The need to comply or co-operate was often forced on it by the sheer diversity and volume of the numbers. We now see the aggregators in the physical world continuing to erode the unique sourcing of titles and in the digital and virtual world they start to come into their own. How have the big publishers responded – they have given their assets (files) to everyone of them, like scattering seeds to the wind. Beware, commodity of distribution often leads to commodity of pricing.

Publishing has always been a relatively low entry business with much of the higher costs outsourced in order to gain the economics of scale and scope. If anything the digital age, irrespective of the output rendition being physical or digital, the cost of entry is being lowered further and outsourcing becomes even more prevalent. Size in relation to new entrants is now not the issue, size in relation to competitors is now not the issue but the ability to develop, manage and license rights profitably is.

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