Thursday, July 12, 2012
So How Will Digital Growth Impact Physical Decline?
We all now accept that digital ebooks will continue to grow at speed, but that it is still highly speculative what the rate of growth and market size will be and that this is likely to vary between genre. We agree with Bloomsbury’s CEO Nigel Newton, when he states that physical books will remain and that we will have a mixed market for in the future. The question that we feel is missing in the digital debate is the impact that digital growth will have on the inevitable shrunken physical supply chain. Some may feel that the digital market is supplemental we would suggest that this will not be so and that the current practice of merely pouring physical content into digital containers will lead to a cannibalisation of physical sales.
The publishing supply chain remains finely balanced and somewhat complex. It remains a ‘many to many’ chain trading in many unique products from many sources. The reality is that any cost or inefficiency to one, is born by all within the chain and so the efficiencies that have been driven into the existing physical chain over the last decade could easily unravel as the economies of scale and scope change and numbers become even less predictable.
We ask the question of what the potential high level impact may be and what the supply chain may look like if the physical market were to shrink by say 20 to 30%?
Many predict the death of the physical bookstore and for many this is probably their fate if they remain wedded to their current model. The front list ‘sale or return’ model has worked well but is in danger of going past its ‘sell by date’ for many. Other retailers are now creaming off the volume on the big sellers and with their pricing clout are making the High Street a no go area for many. The independents have to wake up and sell old, used, bargain and respect that the cosy days of letting the publishers wallpaper their shelves are going and if a 20 to 30% reduction in physical sales were to occur they will have to find alternative revenues. A reduction in revenue can be compensated by higher prices, which is highly unlikely, or by a reduction in cost, which in simple terms would mean a shrinkage in physical square footage – less stores. Waterstones are probably focused on reducing their estate by a significant percentage, getting these right and in doing so retaining their viability, but this option doesn’t exist for independents were the decision may be more binary.
A reduction of selling footage on the High Street is not going to be just down to digital but compounded by other retailers such as the supermarkets and the Internet creaming off the best sellers and higher volume sales.
Some will argue that the independents and High Street is doomed and so what. But as the percentage of the physical sales grows across a handful of channels and the overall volume of physical sales reduces, this has to impact and question the distribution and efficiency of the supporting supply chain. Today many will look to compensate any home sales reduction with exports but there is little to believe that this will not also be effected and the strategy may be more tactical than strategic. There is a clear case for greater physical supply chain consolidation and it is hard to envisage the same number of distribution and wholesale operations.
There is the question of returns. As the physical High Street demand contracts there will be the inevitable increase in consignment errors. The stores will continue to support the low risk returns model which will lead to even more product being shipped around the country with no revenue being generated. The waste is a cost to everyone and will increase as declining sales make some publication’s sale less predictable.
It is fair to assume that you can’t have a significant disruptive impact on one area of the supply chain without the effects also impacting all other areas either in the form of the ripple, or domino effect.
Publishers have many challenges if the physical market were to shrink by 20 to 30%. It’s true that they will still have digital revenues to compensate and to do so at probably better margin and positive impact on their bottomline, but what will this mean to their organisation, processes, and cost structure? It is also true that different publishers will be impacted differently according to their sector coverage and mix of titles, but a 20 to 30% reduction in Physical sales will impact all.
Like any army one has to adapt your resources to fit the battle you are engaged in. The question now is what the organisational impact of not just digital but a contracting physical market will be on publishers?
Rights obviously become even more important but the onus changes with resources need to be deployed to discover and deal with digital infringement, a growing importance of permissions and the obvious greater need to capture, manage and access all rights detail more efficiently.
Marketing and Sales faces change. It is less about filling shelves and spread betting and more about engaging directly with the consumer marketplace. A migration from mass to direct marketing even though the product may be physical or digital. The challenge is whether the sale moves direct or remains through third parties? If the physical market shrinks and consolidates then the need for field sales must also reduce. Perhaps we shall see even more collaboration between competitors to share field sales resource, perhaps we shall publishing outsourcing to call centres to up-sell direct basis. Whatever the mix it will be a mix and it will be interesting to see how not only the large but also the small publisher organises this to balance their digital and physical sales.
Marketing material also stats to change as the physical market declines and consolidates and at the risk of being pillared by the every standards people, maybe the bibliographic and metadata also changes with the remaining clients still requiring more detailed metadata whilst the digital discovery forces more of content itself with secondary promotional materials to be used to engage with the audience.
We could also think about the obvious impact on editorial and production , the author relationship and their royalties, front list, mid list and back list mix and market differences. However, what is clear is that any significant rebalance of the mix between digital and physical markets is going to have an impact on all and we need to think just as much of what this will mean in the physical world as we do in the digital world.
Unfortunately we somehow doubt that there will be an explosion of publishing conferences on the mixed economy and managing the physical offer in a digital world ….