The Hachette versus Amazon battle keeps going on as the most visible symbol of the changing landscape of the publishing industry. I have written about it before, but this time I want to take a look at the situation from a bit broader scope: What should Hachette do to survive not just this battle, but digitalization itself?
Lagardère, the parent company of Hachette, gave a presentation on its views on the publishing market and Hachette’s position in it on their investor day on 28 May 2014. This gives us a good starting point to examine what Hachette thinks it should do, and whether its conclusions and claims are sound.
(Also, I participated in a strategy MOOC recently, so some analysis was good practice for that one as well and I examined Hachette in my final project there.)
Trade publishing market situation
The global megatrend of digitalization has thoroughly affected the competitive landscape in the publishing industry. The most visible sign of this is the ebook market, which has grown to 22% of the trade sales revenue of major publishers in the US in six years according to Hachette. In addition to this, digitalization has created a self-publishing boom, in which 25% of Amazon best-sellers are either self-published or from small publishers, and the majority of author income comes from self-publishing.
This development has made the trade publishing industry a more competitive one from the point of view of all five forces when analyzed with Porter’s five forces analysis. In addition to the effects caused by self-publishing, Amazon has gained a dominant position in book distribution, and thus the bargaining power of buyers has changed completely.
From a global point of view, the UK ebook market, which started two years after the US, has already caught up at 21% of trade sales revenue of major publishers. Meanwhile, the French market, for example, has barely got off the ground. Although this industry change currently only affects the English-speaking world, Hachette itself predicts that it will become global eventually.
Education publishing market situation
The education market is different in that despite even more rapid digitalization, self-publishing has not taken off in the same way. Furthermore, while in trade market the print market is also growing, in education market it is declining. This is reflected by the rapid digitalization of the largest player, Pearson, whose digital revenues have more than doubled in six years to 60% of their total revenue.
One of the main attractions of the education publishing market is the smaller bargaining power of buyers: while there are less education institutes around than consumers, there are a whole lot more education institutes than Amazon. In this aspect, trade and education have switched places, because of the major consolidation on the trade side.
In education market, the digitalization also mostly affects the English-speaking world at the moment, but is predicted to take off globally in the near future.
Competitor analysis: trade publishing market (mostly in the US)
The US trade publishing market is dominated by the “Big 5” publishers: Penguin Random House (27.7%), HarperCollins (10.5%), Simon & Schuster (7.5%), Hachette (5.8%), and Macmillan (4.9%). Both Penguin Random House and HarperCollins have boosted their market share via mergers (Penguin and Random House merged) or acquisitions (HarperCollins acquired Harlequin) recently.
The strategies exhibited by the competitors differ markedly. Penguin Random House, as the result of the merger between Penguin and Random House, is significantly larger than any of the other competitors. It is mostly carrying on business as usual, and it has also boosted its international presence through the acquisition of Santillana Ediciones Generales this year, expanding it into Spanish and Portuguese markets.
The middle-of-the-pack competitors HarperCollins and Simon & Schuster have experimented with digital the most, including ebook-only publishing, self-publishing support, subscription-based services, and print & digital bundling.
Macmillan, which is the smallest of the big publishers in the US, has pursued yet another route: it has strongly refocused on education in the US, especially state-of-the-art digital services, and its education offering is outperforming its trade offering. It has also started to experiment with self-publishing support and subscriptions in its home market in Germany.
Hachette has focused on digitalizing all of its offerings, but not entering into any new business models, instead protecting its assets through careful rights management and leveraging its size in negotiations.
Hachette’s current competitive position
Hachette’s business has been steady and profitable for the past six years. It holds the pole position in France, as well as significant positions in Spain and Latin America, markets that have not yet entered the digital era.
Hachette is the #4 publisher in the US, but at a 5.8% market share, it does not hold a good bargaining position against Amazon, the dominant distributor. Beyond converting its catalog into digital format, it is also not taking part of the digital transformation of the publishing industry in any major way.
Therefore, unless action is taken, it is likely that Hachette will fall behind in the US market, and then be in a difficult position to defend its home markets when digitalization begins there in full.
Possible options for Hachette
The double squeeze between self-publishing and Amazon’s dominance in distribution makes for a difficult position. Let’s examine potential actions for each of these in turn.
Possible ways to deal with intermediaries (Amazon)
In his HBR article, Benjamin Edelman lines out four potential ways to deal with intermediaries. The paths he identifies are:
- Exploit the platform’s need for completeness
- Identify and discredit discrimination
- Support or create an alternative platform
- Deal more directly
Hachette’s size does not enable it to exploit Amazon’s need for completeness: Hachette needs Amazon more than Amazon needs Hachette. Furthermore, even if it were to pursue mergers and acquisitions, these would not ensure a good bargaining position in the long term, as the size of the self-publishing market in the future is uncertain.
Hachette has attempted to discredit the discrimination Amazon has brought to play as part of the ongoing negotiations, but so far this has not proven to be effective either.
While middle-of-the-pack competitors HarperCollins and Simon & Schuster have moved to support new platforms with new business models, Hachette has so far been reluctant to do so. Alternative platforms pursuing the same business model have not been successful so far.
Hachette has already announced its new initiatives to deal more directly with customer via CRM development, but this has not yet been seen in practice.
Overall, Hachette does not seem have any good ways to deal with Amazon. Alternative platforms with alternative business models seems to be the most promising path, but Hachette has not pursued it yet in any way.
Possible ways to deal with self-publishing
According to Hachette, traditional publishing will remain superior to self-publishing as a business model:
- Consumers need advice and recommendations, and publishers act as sifters who provide superior works for consumer consumption.
- Best-selling authors need exclusive services: advances, editorial expertise, marketing, and sales clout.
- Rare self-published authors proving to be successful subsequently looked for a traditional publisher in order to increase their sales.
- With a forecasted digital penetration of the market of <40%, publishing will still be driven by print book sales: the complexity of the business will remain and won’t be acquired by new players.
However, it is unlikely that these arguments stand to scrutiny. Self-published authors have already topped the sales charts, some of them without any background in traditional publishing. The claim that self-publishing success is rare, or that successful self-publishing authors always seek traditional publishing deals, is simply false.
While publishers retain their brand and the associated prestige of working with them, even these assets are deteriorating as self-publishers gain increased market share. Editorial expertise and marketing expertise are potential assets, but the level of capabilities held by traditional publishers are unclear. Furthermore, the role of recommendations is increasingly moving to social media and peer-to-peer discussion instead of reliance on brands, so the whole rationale on why consumers need publishers is on thin ice.
As an example of Hachette’s marketing capabilities, they mention their work with the author Michael Connelly, such as a Twitter account. This Twitter account of the multi-million selling author is “the official Twitter page for author Michael Connelly, run by his webmaster” and has garnered 11,600 followers. J.K. Rowling has 3.47 million followers, by the way. No wonder H.M. Ward, a successful self-published author, has questioned the marketing capabilities of publishers.
The digital penetration claim is a curious one. In the same document, Hachette predicts that education publishing will go full digital, even in markets such as France, where it is currently non-existing, by 2025. Likewise, Hachette makes the point to always acquire both print and digital rights. While the revenue from ebooks plateaued for major publishers in the US market in 2013, the volume sold actually kept increasing even for major publishers, and self-publishers won over more ground, so there are no clear signs of digital losing pace.
The most concerning thing about Hachette’s claims is that they seem to be completely detached from reality. When a company begins justifying its strategic choices based on fairy tale instead of facts, there are good reasons to be deeply suspicious of the viability of their plans.
What should Hachette do?
It is important to address both short-term interests and to create a good competitive position for the long term. In order to achieve these, Hachette could pursue the following courses of action.
Seek a merger with Macmillan
There are four potential candidates for a merger, and the best one of those candidates is Macmillan:
- The operations of Macmillan and Hachette do not overlap in any significant way.
- The merger would provide them with 10.8% market share in the US trade publishing market, second only to Penguin Random House, thus increasing their bargaining power.
- Macmillan is strong in new education ventures in the US, while Hachette is strong in traditional education ventures in France, Spain, and Latin America – Macmillan’s capabilities could be used to further strengthen the position on these markets.
- Macmillan is strong in the German-speaking market, while Hachette is strong in French- and Spanish-speaking markets. Both hold a reasonable position in the English-speaking market. The merger would create a powerhouse spanning four major language areas, which would be an asset to attract authors.
- Language remains the final barrier to entry: translating a book and, even more significantly, marketing it proficiently in a different language area are complex tasks, and while many companies are working on improving translation technology, it still has a long way to go before instant translation works sufficiently well for professional translation or marketing. This means that a multi-lingual publisher can still find a good competitive position.
Why not one of the other four? Penguin Random House is huge and partially overlapping; it would also be doubtful whether antitrust authorities would allow such a major merger. On the other hand, HarperCollins and Simon & Schuster are mostly focused on English-speaking trade publishing, so a merger with them lacks the synergies that a merger with Macmillan could offer.
Build up capabilities and digital offerings
Increased size can give bargaining power to maintain the existing business model in the short term, but is unlikely to ensure success in the long term. In order to remain viable in a world where self-publishing is a viable, perhaps even the first, choice, a publisher needs to offer authors something they do not get otherwise:
- Strict selection process for titles published under main brands in order to protect the brands.
- Build up multi-lingual editorial and marketing capabilities in order to attract authors.
- Innovate in the digital education space to maintain strong position in the more favorable education market.
- Harvest existing markets outside US/UK for maximum profits, and be ready for digitalization.
A publisher who can really be a service provider for both the author and the consumer has a chance to survive, and profit. Maintaining strong brands and helping selected authors sell more books provides an opportunity for the publisher to also get a cut. Otherwise they risk being left out of the picture altogether, at least in trade publishing. There are more opportunities in the education space, but other companies are innovating there a lot more than Hachette, so it is in risk of getting trampled by its more traditional competitors on that market.
Hachette has perhaps the strongest short-term position of the Big 5 publishers, because it has significant business in markets that have not yet entered the digital era at all, and there it can fully exploit its position as a major company.
However, when it comes to long-term competitive position, I rank Hachette as the worst one. They have so far completely failed to sense the change that is transforming the industry, much less seize it. The global nature of Hachette’s business gives it a good starting point, and if it were to change its strategy soon, it could still navigate to a very attractive position.
So far Hachette seems to cling to a wish that dominant size ensures success, but with no barriers to entry into the digital market and the increasing importance of social media, size no longer matters. Authors can bypass publishers left and right and leave them wondering what just happened. Unless Hachette changes its ways, its downfall will be rapid once all of its markets enter the digital era.
Photo: Hachette bookstore by akaltori @ Flickr (CC)