The Trouble With Consolidation: Part 2

After taking a few weeks of some pretty harsh criticism from publishers, indy book retailers, and more importantly, authors, Amazon has responded with a blog post on the Kindle forum where they try to explain their position reagrding their dispute with book publisher Hachette in more detail.

Amazon Kindle

The bottom line is that Amazon wants the price of all electronic books to be $9.99. They want this price because as far as they are concerned, the cost of producing an electronic book is significantly lower than the cost of producing a print book. To a certain sense, this makes sense. There’s no printing, shipping, warehousing, showrooming or (if you’re lucky and have a hit) re-printing involved in electronic book publishing.

hachette_book_logo

Amazon also produces some pretty “compelling” math and statistics to prove that you can sell more e-books at $9.99 at a higher price and that in the end, everyone would make more money.

That sounds nice. And I confess that after reading all this I stood up to take a few turns around the office, and said “Hmmmm” to myself.

As it is Audited Media filing week (formerly known as ABC Audit week) I’m a tad busy. I can’t spend nearly as much time on this as I’d like to. However, here are a few thoughts:

  • Amazon is not the only e-book publisher out there. Who says they get to set the price?
  • Does the price of anything always really reflect the cost of production? Why is that such a big argument when we discuss e-media? Bottled water, anyone? A “small” cup of pop at the movie theater? Does the production cost of a luxury vehicle really reflect the final price the buyer pays? Breakfast cereal? Please.*
  • Continuing on that train of thought: If I want to buy the latest release of Brandon Sanderson’s “Way of Kings” series, I’m going to go to my nearest store and buy it (or download it) whether or not the price is $9.99 or $14.99 for digital or $28.99 for the hardcover, I’m going to buy it. Price sensitivity is important in publishing, but not that important. Although I will concede that I am thinking about established authors. Especially if we’re talking about established authors.
  • And why would you want to set the “high-end” so low? That strikes me as remarkably short-sighted. Does this mean that in a year or two we’ll have Amazon arguing with another publisher about setting the e-book price at $7.99?
  • I will also concede Amazon’s point about e-reading (and all reading) competing against many other forms of entertainment. In the year 2014, this mostly means electronic. But I don’t think price is the issue. It’s the other stuff. We’re a family of dedicated readers and there are books and magazines all over our home. But after a busy day the question is often: Reading or Netflix. You’d be surprised how often Netflix or On Demand win.
  • It feels like Amazon is trying to position themselves as the author’s ally.
  • But unless you’re an indy author self publishing on Amazon, an established author does business with their publisher. Why? Because Amazon is not the only retailer out there. And if you do self publish, then Amazon is both publisher and retailer so Amazon is the “middleman”. I know that must be a shock to all the fanboys out there who think the internet will be the end of all evil and dreaded “middlemen.”
  • And, as I understand it, Amazon tells their indy publishers that they can change the terms of their contract at any moment. As a representative of magazine publishers, if a national distributor or wholesaler or retailer had that in their boilerplate and that was their starting negotiating position, I would look a little askance at that contract, the people who created it, and be very wary about how much business I gave them.

It’s important to retailers to develop their brand and create a look and feel for their customers. If they are smart, like Amazon, they have excellent customer service and a friendly shopping experience. One of the big raps on Borders towards the end of its life cycle was that shopping in the stores was not a pleasant experience.

Do readers really care about the publisher? No, they want a book by a particular author or a book in a particular genre. That will always be the case and that’s what makes this fight a hard one for Hachette. Authors are the brand. Their publishers promote the brand. Retailers can behave like a brand.

Authors, like magazine publishers, are the producers of a very specific, very unique product. It is not anything like toiletries, food, office supplies, dog food or kitty litter or any other retail product. Amazon has been succesful because they did cleverly take advantage of an industry that was complacent, short-sighted and didn’t understand the benefits of the nascent world of e-commerce.

A world of books (or magazines for that matter) that is dominated by only one or two retail outlets is a world that is dependent on the whims of a conference room full of people and their own objectives and algorithms. They may or may not be looking out for the producers or the consumers no matter what slogans they repeat.

And that is the trouble with consolidation.

*: Seriously, this whole “it costs less to produce a book, magazine, newspaper” on the web so the price should be $9.99 or $2.99 or $0.99 really drives me crazy. Since when? What’s the profit margin on your latte this morning?

And let me ask you, if and when Amazon or Alibaba or whoever might win it all owns 85% or 90% or more of the market, do you honestly think the price will remain there? Do you think the offer to the publishers or suppliers will remain where it is now? At what they deem “fair”? Do you really think your customer satisfaction will remain as high as it is today? I’m sorry, I don’t mean to be cynical, but seriously…Oh, look! A pretty unicorn….

Things Placed in Front of, On and Instead of The Magazine Rack

A few weeks back the family and I traveled east to New England to attend a family function. It was incredibly fun seeing friends and relatives and visting the old ‘hood’ where I grew up. On Friday night, we stopped at a local Walgreens (that used to be an indy drugstore) to pick up a few things we left at home and of course, I wandered over to the magazine rack. This is what I saw:

Someone's got a merchandising issue...
Someone’s got a merchandising issue…

Did the merchandiser just give up in the middle of the job and walk away?

Walgreens Springfield MA 2

As you can see from the DVD speed table in front of the rack, there’s already a decent amount of merchandise a customer has to traverse to get to the rack. So it’s unfortunate that for whatever reason, the totes where left out.

The following week, I was finally able to spend some time checking out the new Fresh Thyme Supermarket that recently opened in town. It’s very exciting to see a new company take off and even more exciting when they decide to open on of their first stores in your own town. Even better, they carry magazines!

Well that could slow sales...
Well that could slow sales…

So it was a little disappointing to see that the retailer had decided to jam up their sales potential by hanging coupon circulars on the checkout rack. You can almost see the buyer sitting in her office scanning the POS reports and saying “Hmmm, magazines aren’t performing so well. Maybe we should…..”

Further up the street, our local Walgreens was caught up in the Source bankruptcy. For a few weeks the rack was incredibly stale. Then it was empty, and then these signs and just a little fresh product popped up:

Walgreens 1

Walgreens2

Yesterday the pre-weekend deliveries finally started to catch up and about half of the rack was filled with fresh new product:

We're getting there....
We’re getting there….

But the other half of the rack is still filled with Skinny Pop (which is tasty). It’s on sale for $2.99 a bag.

A magazine and a bag of Skinny Pop. Less than $10 bucks and a few hours of excellent down time...
A magazine and a bag of Skinny Pop. Less than $10 bucks and a few hours of excellent down time…

In a conference call the other day a client pointed out that it is sometimes difficult for the sales people she works with to grasp the intricacies that the technical people in her company have to work with. It’s easy to say that the e-blast should be laid out just so and these fifteen links should be live and line up just there and it should all be done and ready to shoot into the ether in the next twenty-four hours.

The reality, of course, is quite different. In spite of all of the advertising about how quick and easy all the technology is, it’s not that easy.

I should have taken that moment to point out how difficult it is to re-negotiate service contracts, realign print orders, create new routes, hire new merchandisers and service new retailers. The last two pictures illustrate that point very well. It’s hard, but it can be done. And I should add that it’s being done pretty well.

On the other hand, the first two pictures illustrate some of the issues our industry continues to deal with: effective merchandising and the teaching of our retail partners.

We have to do a better job of merchandising. And we have to do a better job of educating our retailers on why the don’t want to put things in front of, on or in place of, the magazine rack.

 

 

 

So What’s Different This Time: Part 2

Update: I recieved the following note from a former wholesaler last week and in between family reunions and jury duty, I never got around to posting it until now:

“In regards to your blog of today (7-10), I find it interesting that we are considering selling on a non-returnable (outright) basis.  There are a few comments that you might find interesting.

 Putting the product out and cutting the price until it is gone is appealing.  We function in a system where the defining indicator of value is that the product is not out-of-date.  And then we turn around and put a date on the front cover.  I find that odd in the discussion of inefficient sell-through.  Are we trying to solve a problem of our own making?  Who of us has not read a six month old magazine in a doctor’s office?  Earlier this week I read a four month old Car and Driver while having my SUV’s oil changed.  I read it because there was little else to do while waiting.  What was important in that issue were the articles on Porche, Lamborghinni, Ferrari, Mercedes, etc.  You know, the fantasies I will never attain.  I didn’t look at the issue date.   It didn’t really matter.  I wonder if it matters to John Q. Public.  It seems to me the content of most publications is more important the issue date.  On the other hand, timliness is also important.  Given the speed of today’s technology and the instant gratification demands of our society, I really doubt that any printed publication is really timely.
So, if we cannot compete in the timeliness arena, then where do we compete?  Can we compete profitably?  Each publisher has to weigh the factors and decide what is in it’s best interest.  I am fairly certain that the distribution structure under which Backwoodsman operates would be different then the one for Cosmopolitan.  God help us if they each would need a different kind of wholesaler.  Two wholesalers on one rack was a bad idea last century and would be in this one too.
One thing is for certain – RDA has no place in anybody’s scenario.”

Editor’s Note: Music to accompany this post it brought to you by the Department of Obvious and The Alan Parsons Project.

At it’s best, Source Interlink was an interesting amalgamation of ideas and retail services that never quite worked exactly as its creators and executives expected. Many of us from the other side of the desk were not surprised.

Source is now gone from the picture. That’s too bad. The pool of independent magazine wholesalers is fewer than twenty. The systems of checks and balances that held this magazine distribution system together unraveled years ago.

So what’s next?

A colleague reminded me: From the late 1950′s to the early 1990′s, the magazine wholesaler system worked primarily because of the power that TV Guide and a few other “must carry” magazines wielded over most mass market retailers. If your local supermarket or discount store or drugstore wanted TV Guide or one of the “Seven Sisters” or Playboy or Penthouse (Yes, prior to the Meese Commission you could find Playboy  in supermarket checkouts), and that store was located somewhere in the Holyoke, MA service area, then the retailer could get those magazines from the Holyoke News Company of Holyoke, MA. There was no other alternative. Holyoke News was the only full service magazine wholesaler for that market because TV Guide and the major publishers wanted it that way. That was the system.

But as local chains morphed into national chains and the power of those mass market titles waned, well, the world went up for grabs. Magazine wholesalers who often never strayed beyond their area code were suddenly trying to do business in places they had only visited while passing through on their way to somewhere else.

Talk about having to grow up fast.

The system that provided these wholesalers with their territories and profits now decided, for better or worse, (mostly worse considering the results) that they didn’t want to adapt to the new reality. We’ve had a mass sell off of once profitable businesses, several major financial collapses of large wholesale operations and a consolidation of national distributors. And here we are: Two big wholesalers, one much larger than the other, neither reportedly making any money.

Sure, sales are down because: digital. Or whatever. Or Netflix. Or Hulu. Or mobile. Or all of the above. But I think you could make the case that sales are depressed even further because the system we now operate under is not conducive to sales.

So what is next? What is different, this time? Can this be better?

What’s not different is how closed mouthed industry professionals are about how they’d like to see the system restored to profitability. Is it because we’re so close to it that we can’t see the way out? Or perhaps because we don’t want to say something heretical and then have to do a mea culpa or two while we continue to work within the existing system.

Not surprisingly when I asked newsletter purveyor and futurist Bob Sacks of “BoSacks” fame what he thought was the best way to get us to profitability, he was not concerned with offering his take on the situation:

“I’m going to offer some heresy,” Sacks said. “Go non-returnable.”

This isn’t a new idea. One Source out of Denver, CO has supplied with magazines on a non-returnable basis. One of my clients serviced an overseas chain non-returnable. My former publisher, Athlon Sports used to sell their sports annuals on a non returnable basis right up until the late 1990′s. But a whole system devoted to non-returnable?

“From a production persons’ perspective,” opined Sacks, “it’s costly to make so much product, and then not sell it.” Sacks’ background in the publishing industry was in production and distribution.

It should be noted that the current average mainline sell through for many magazines is 30% of all copies sold (or often less). Sacks also points to China where magazines stay on the racks at increasingly discounted prices until they are sold.

Would this work? I honestly don’t know and I’ve been a little too busy to even try crunching some numbers. What do you all think?

The balance of the other industry professionals I spoke with did so with the understanding that they remain anonymous. This is not surprising considering how volatile the current arrangement we operate under is.

What I did find fascinating was how close everyone was with regards to what was suggested.

The solution most frequently proposed was a trip to the “Way Back” machine and the suggestion that we move to “Fee for Service”.

The idea of “Fee for Service” has been around for a long time. Most iterations of “Fee for Service” suggest paying a traditional wholesaler on a sliding scale of fees depending on volume, sell through and the services the wholesaler is requested to perform on the publishers behalf.

Almost every professional I spoke with, with the exception of those who had worked at one time or another for a wholesale operation, felt that “Fee for Service” in some form or another was the way to go. Many industry professionals also suggested that this would also be an ideal time to get rid of RDA.

In one case, where it was clear that the interview subject had spent much time thinking about this, the “Fee for Service” wholesaler was co-owned by the publishers/national distributors and treated like a public utility. To my mind, this scenario makes the most sense because it is the most fair to publishers of all sizes. But it’s not going to happen.

People who had worked within the wholesaler system at one time seemed to like the idea of “Fee for Service”, but recognizing the reality of thin profits, they also liked the idea of hanging onto all or most of their current discounts. That’s pretty much where we are now.

What’s different this time is that most of the chains are switching service providers more quickly. As a result, we see copies are being shifted more quickly.

That is, of course, provided the publisher has signed off on TNG’s new pricing terms.

What’s different this time is TNG’s new pricing terms.

There’s already been an enormous amount of back channel chatter about the terms of the indemnification clause. Yes, it wasn’t elegantly written. But I’m guessing that TNG just doesn’t want get sued (Who does?). Didn’t like the language? Many publishers submitted a revision.

The rest of the terms make sense from a wholesaler’s perspective. Especially if that wholesaler is interested in making some money distributing magazines. And should we begrudge a company its desire to make a profit?

But here we are. For better or for worse, we’re going to be distributing magazines to the reading public with the system that was created, evolved, stagnated, crashed, got up, crashed again, got up, crashed again.

We will go through this again in a few years? I would imagine that no one wants to.

So maybe the question should be, “What has to be different this time?”

We have to look at pricing parity between newsstand and subscription. Why would you charge 1/5 or less of the newsstand price for a subscription? Do you have that little confidence in your editorial content?

We can’t print tens of thousands of copies of a magazine, toss it out to the newsstand and hope that someone walks by and suddenly wants to buy a magazine? True we have a lot more data available to us about what the distribution looks like, but we’re still mostly spitballing.

We are starting to see publishers utilize more sophisticated methods of moving their audience into stores to get magazines, but we have to move on this more quickly. It’s a frustrating process and the inertia that exists in publishing houses to simply have a meeting, say “That’s a really good idea” and then move on to the next meeting is very great.

In a June 30th guest editorial in “The New Single Copy”,  Taunton Press VP Jay Annis suggests a concerted effort on the part of publishers to visit with retailers and sell the message of how magazines can help engage the retailers customers.

Sign me up.

But we’d better make sure when we walk into that retailers office that we have something in mind and that our publishing partners are ready to pull the trigger on the program. And it would help if we include our wholesaling partner and they are ready to make the delivery and perform the appropriate merchandising.

As Annis wrote in his editorial:

“…In each case, at least from a publisher’s perspective, there were two consequences; publishers eventually were forced to pay more for distribution, and instead of the promise of more…space, better placement, more checkouts, the opposite occurred…Yet I, as a publisher, am asked to have faith in how the system works. The system is in worse shape today than at any time in the last 5 years.”

So how do we fix this?

 

One More Thing: I’m interested in hearing what you have to say. Drop me a note or leave something in the comments section. How can we fix the distribution system? Because all our other efforts will come to naught if we can’t get to market, to the right market, in the right quantities, and in a way that a profit can be generated.

 

 

 

 

 

 

The Saddest Little Magazine Rack

This just in from a West Coast correspondent:

There's no way to prettify that....
There’s no way to prettify that….

This rack is located in a store in Northern California and despite its small size, if it looks this bare now, perhaps it sold a decent amount of product when it was serviced.

Over the past few weeks, I’ve found it easy to be caught up in the moment. After all we’re busy with all of this. The bigger retailers are signing up with the remaining wholesalers at a fast pace. Service seems to be getting restored quickly to the major chains. It looks like over 70% of Source’s retailer base is now signed with a new wholesaler. I’ve seen some excellent work from my national distributors when it comes to figuring out how to get the distributions and copies transferred accurately. But let’s not kid ourselves. Accounts were not serviced. For several weeks. If you don’t refresh your product, it gets stale. The formula is very simple:

No fresh product=No sales=no revenue

Selling magazines is not like selling a eight-pack of brand name bath tissue. It’s more like selling fresh endive. People have to see it, want it, justify that want, then pick it up. You need toilet paper. You may need fresh vegetables, but you have to want endive. Leave it on the rack too long, it’s not going to be pretty. The people in our industry have performed some great work over the past few weeks under some very difficult circumstances. Anyone who has witnessed this should be impressed. But let’s not forget why our colleagues have had to work so hard in the first place.

And let’s get some fresh magazines onto that sad little rack.