Amazon, Lean, APE, and the future of publishing

Amazon, Lean, APE, and the future of publishingThe New York Times published an article about Amazon last week titled As Competition Wanes, Amazon Cuts Back Discounts as well as an accompanying blog post titled The Price of Amazon. These two articles, both written by David Streitfeld, convinced me that the publishing industry is failing catastrophically.

In this post, I will elaborate on how the publishing industry is failing, what does Lean at Amazon have to do with why Amazon succeeds, and why Guy Kawasaki’s and Shawn Welch’s recent book, APE: Author, Publisher, Entrepreneur-How to Publish a Book, should be read by most traditional publishers.

The old-fashioned publishing industry operating model

Guy Kawasaki and Shawn Welch describe the traditional publishing process as follows:

  • 3-6 months knocking on the doors of publishers and agents
  • 2-3 months of contract negotiations
  • 12 months of writing
  • 2-3 months of editing by the copyeditor
  • 1 month of implementing the corrections by the author
  • Book hits the stores
  • 3 months of attempting to get some sort of marketing plan from the publisher to come to the conclusion that you are the primary person responsible for marketing your book, and publishers mainly help books that already sell well to sell even better

That does not sound very efficient at all. But this is not yet even the end of the story. Another issue emerges with pricing.

The industry standard pricing schema is for the wholesaler to receive the books at a 55% discount from the manufacturer’s suggested retail price (MSRP), and the bookstore to receive them from the wholesaler at a 40% discount from the MSRP. Thus, an MSRP $20 book is sold to the wholesaler for $9 and to the bookstore for $12. This pricing is just enough for a traditional brick-and-mortar store to turn in a reasonable profit. The MSRP is also very rigid, in fact many publishers print it on the cover of the book!

Amazon is evil, because..

In David Streitfeld’s blog post at NY Times webpage, one publisher shares his opinions on Amazon. He is Dennis Loy Johnson from the Melville House. I think his comments demonstrate very well how out of touch the publishing industry has fallen, which I why I quote him at length:

I don’t like the fact that there’s one retailer able to so massively underprice other retailers, especially in a business that so desperately needs more retailers. And I don’t like the inconsistency of the pricing, either — the raising, the lowering — because it sends a confusing message that good books are worth less, and because it encourages buying based on something other than the quality of the book. It’s just an unhealthy business if people are buying a thing mostly because of its price, not its quality. That’s how you sell widgets, not books. … Discounting, and especially inconsistent or shifting discounting, really messes with a publisher’s ability to price a book fairly and accurately to its cost … So do you raise the price, knowing they’re going to lower it, so that the price will then appear closer to what you need it to be? But if you do that then you’re screwing the more honest retailers who can’t discount.

Streitfeld also provides an anonymous comment from a small nonfiction publisher, according to whom “the retailer sold its books at a discount ranging from 25 to 35 percent for years. Then, despite steady sales, the discounts began to shrink.”

The arguments against Amazon are thus the following:

  • No retailer should be able to undercut other retailers, so that everyone can stay in business
  • Pricing should not change, because:
    • A good book should always command a high price
    • Cheap books encourage people to buy books to try them out instead of only buying books they know to be good
    • If a retailer can change the price, then the publisher cannot control prices
    • If a retailer sells something at discounted pricing, they should keep selling the items at discounted pricing indefinitely

I am sorry if this formulation of the arguments makes them seem ridiculous. It simply is the best I can do.

Amazon is Lean, but publishers and other retailers are not

The big thing about Amazon, and the reason I predict it will have a long and successful life, is its firm commitment to Lean. If you are willing to spend 49 minutes of your life to hear one of the most profound business presentations ever given, check out Mark A. Onetto, Senior Vice President of Worldwide Operations, Amazon.com, giving a presentation about Lean at Amazon in 2009 (the video is 58 minutes, but the final questions are not that relevant, so you can stop at 49:00).

Amazon is able to undercut other retailers partly because it is an online store, but more because it is a Lean company that is relentless in eliminating waste and improving its operations, and it is never satisfied with the level it has reached.

What happens when a non-Lean company goes against a Lean company? Ask General Motors, Chrysler, and Ford. Look at how Toyota came, crept to an even level with them, and whooshed past. Because of continuous improvement, kaizen, Toyota was able to reach and surpass its competitors, taking one small step at a time, every day. It came out of nowhere, and suddenly it was past its competitors and very difficult to reach, because operative performance is not built in a day but through relentless work every day. It is very difficult to catch one of those trains, if it has already sped past you. It’s the same with Amazon.

So, why is Amazon able to undercut its competitors? Because it has built this machine for years, while others have remained stagnant.

Why does Amazon change its pricing all the time? Because they collect data and make decisions based on that data. To my knowledge, they have never exceeded the MSRP, just changed the amount of discount.

Regarding the case where Amazon reduced its discounts that had stayed steady for years for a small publisher, imagine this situation in the automotive industry. Assuming that the wholesale price and MSRP remained the same the whole time, do you think Toyota would let its suppliers run at the same level of efficiency year after year? No, it would not. Well, Toyota has a limited number of suppliers, and they would help their suppliers with kaizen to improve, but Amazon is not in a position to do so for all small publishers. The small publisher should have been able to improve its own efficiency over the years, resulting in lower wholesale prices and lower MSRP, while retaining same or improved margins. This is not happening in publishing!

Mark Onetto briefly touches upon books in his 2009 presentation. In it, he states that 35% of printed books are never read, instead, they go to waste. He also tells that Amazon’s print-on-demand (POD) model allows them to print and package a book within 4 hours of a customer order. This is the Lean ideal of single piece flow!

A Lean publishing industry and self-publishing

Guy Kawasaki and Shawn Welch argue for the tremendous opportunities in self-publishing in their recent book, APE: Author, Publisher, Entrepreneur-How to Publish a Book.

One of the points they make is that as a self-publisher you have full control over pricing, and can run various campaigns and monitor their effect on sales. As anecdotal evidence, I bought my copy from one of their discount campaigns after seeing Guy’s tweet that advertised it. In this case, it is the publisher who is constantly changing the price, not Amazon! If the publishing industry cannot take this model into use, it will play a big part in their downfall.

If there is going to be a publishing industry, it has to justify its existence by two routes: providing services that self-publishers cannot easily do, and constantly increasing the efficiency of its processes. This is why people in the traditional publishing industry should read Guy’s book: they have to know what is possible for a self-publisher and innovate services that keep them competitive.

A good example of service provision is O’Reilly Media, also mentioned in Guy’s book. They offer their books also as direct sales in multiple formats, organize conferences, offer webcasts, and even offer the chance to buy books as they are being written to get an early sneak peek into the content. Tim O’Reilly understands the social technologies of today, and I have followed him on Twitter and Google+ for a long time.

What I don’t know about O’Reilly is how effective their operations are. Their pricing is definitely not low-end as a general rule (they do run discount campaigns), but there is no necessary connection between pricing and internal cost level. As they are already social, they could add Lean to the mix, and become a Lean social business relatively easily. What an opportunity!

In general, the lead time from an idea to a book described at the beginning of this blog post is not acceptable. It is the publishers’ task to find out ways to improve time-to-market, author support, editing, copyediting, graphical design, printing, and distribution. The more effectively a publisher can accomplish these tasks, the more attractive an option they are for an author and the more profitable they can be.

Note that I have barely touched the format that books come in. It is an important part of the equation, but by no means the only one. The Lean ideal is single piece flow, which can be realized through print-on-demand or ebooks. Offset printing is not dead yet, either, as with current technology there are still economies of scale in this industry. There are no doubt significant savings opportunities in printing itself, but when inspecting the entire process, those are only one part of it. For there to be a publishing industry instead of just self-publishers in the future, the publishing industry has to create operating models that flow and provide added value.

Picture: Cover of APE by Guy Kawasaki and Shawn Welch (Fair use, post is discussing the product in question)

Author: Ville Kilkku

I run my own consultancy business, so if you find the ideas on this blog intriguing, contact me at consulting@kilkku.com or call me at +358 50 588 5043 and we can discuss how I can help you solve your business problems. I am currently based in Turku, Finland, but work globally. Google+