The book industry -- times are a changing

A story in the Publishers Weekly says that Borders has agreed to buy titles from HarperStudio on a non-returnable basis. The average book buyer will ask, "So what's the big deal?" But to people in the industry it is a radical shift, perhaps the sort of change that is required for the industry to survive and bring back some sense into it.

I will start with a primer on how the book industry currently operates. (Okay, this is how it operates in the US, the UK, Australia and Malaysia -- we think it's cool to ape everything they do in the US and UK without understanding why.)

In a simple world, publishers publish. Then the distributor's undertake to distribute the book for a fee of, say, between 50-60% of the RRP. They then sells the books to the bookseller for a discount of, say 30-40%, usually depending on volume. (The actual discounts vary, but this is an example.) The publisher meets the printing cost, royalty payments and overheads from his portion. The distributor costs are warehousing, transportation and administration. The bookstore has to pay his rental and his overheads. Not much meat in there, really.

Then comes the first distortion. The distributor sells the books to the book retailer on an SOR basis, that is, on sale-or-return terms. So books that are not sold will be returned to the distributor who will then issue a credit note. And the distributor likewise will return the books he cannot sell (including the returns he gets from the book retailer) to the publisher. The publisher then pays the author a royalty on what has been sold and then pulps or remainders the rest. (It costs more to pulp it than give it away or sell it cheap.)

There is a huge trade in remaindered books with many book retailers practically specialising in it. The general rule in this business is that the less you are allowed to choose the cheaper the books cost. Of course, the author earns no royalty from this type of sale (and this trade might even be in violation of the fine print on the copyright page that says 'no reselling'.) One problem with the SOR model is that bookstores can order 100 copies of a title even when they know they can only sell 25 because they can return the rest. (The rest are used to decorate the shop to make it look good.) Returns in this country are normally allowed within a period of one year, but it is usually done within six months. Some do it in three, just when the payments are due. After this most books are considered dead because few are reordered, except by independents and chains specialising in back lists. (The real bookstores.)

The next distortion came with the advent of mega-bookstore and supermarket chains. These stores started ordering books in thousands (and in the case of Harry Potter, hundreds of thousands) demanding huge discounts of between 75-85%, and bought their books directly from the publisher. This put a lot of pressure on the latter because of the high printing costs and, God forbid, probable massive returns within three months. The only way a publisher could handle this was by raising the marked price on the book. (Now you know why books are so expensive.) Books became commodities like rice, sugar, or shoes. People who sold books this way knew as much about them as hamburger-flippers.

In Malaysia right now, book distributors are holding their breath, waiting for the other shoe to drop -- with the holiday season over, the returns are going to start soon. If the returns are as big as many people think they will be the repercussions to the industry could be serious. If it is larger, the effect could be catastrophic, and some people could go under.

Multiply the above a hundred fold and you get and idea of what they are facing in the UK and US. Add to that the past leveraging power of the mega-store chains that took out huge loans to expand ruthlessly, to stock up with huge inventories that they knew they could return, and sell them at massive discounts to kill the competition (and, to a certain extent, themselves).

Sensible people have been warning about this for two decades (just as they have been warning about the hubris on Wall Street). But reason has no answer for unmitigated greed, until the latter blows up in the face, that is.

Some publishers are not going to survive to see this, but firm sales could be a game changer. Some sanity could return to the industry, at last. Book retailers will only buy what they think they can sell if distributors will not take returns. Ditto with publishers. With no requirement to wallpaper the mega-chain stores premises with their books, publishers will not have to publish 1,000,000 copies to sell 100,000, and the subsequent lower overheads could mean lower prices for the consumer. It could also mean less carpet-bombing by publishers – less titles, but more carefully selected ones.

Of course, there will be fewer JK Rowlings. But that might not be such a bad thing.