Modeling for the Future

Trade publishers must not only understand the needs of consumers better, they need to have a better idea of what works best at their own companies. So said Kosmo Kalliarekos, senior partner with the Parthenon Group and the keynote speaker at the recent Industry Summit held by Publishers Weekly and sponsored by Phoenix Color Corp.

In Kalliarekos's view, publishers should conduct internal audits to both understand what really drives profitability at their companies and to quantify the return on investment for each book produced. He stressed that publishers should focus on key "customer clusters" and identify what books those groups are looking for, while also working more closely with retail partners "to anticipate customers' needs and trends." The combination of a deeper understanding of their customers and a better handle on what works best at their own companies will allow publishers to develop more focused business models, Kalliarekos maintained.

Kalliarekos's central theme is that a more focused business model is the way for publishers to mitigate risks. In his presentation, he discussed three different types: consumer-driven category management; private equity approach; and brand management. For all but the largest publishers, he said, companies should employ only one model. And even the largest publishers should take care not to become confused about what business they intend to pursue. All three business models acknowledge that publishers must remain "the great creator" of content, but the key component of each is more market awareness.

The category-management approach requires a deep understanding of the end user, while a publisher must develop a "proactive" approach to its publishing portfolio. In Kalliarekos's scenario, after determining what consumers want, the publisher then assigns an author to develop the book on a work-for-hire basis. This type of approach has been successful for travel, test-prep and how-to publishers, and could be expanded to other genres, Kalliarekos said.

The private-equity approach, Kalliarekos said, "stems from the commonly held belief that book success is more of an art than science." This method allows publishers to publish a large number of books by giving low author advances. To be successful using this approach, publishers must be especially controlled in paying advances, since too many unearned advances will ruin the model.

The brand-management approach promotes "disciplined advances for marketable authors," Kalliarekos explained. For the most part, brand management means publishing fewer authors, but "going deeper" with the ones that are published, he said. Publishers are often the first media outlet to bring a person's work to the public and they should "invest a little bit more to capture more revenue streams," Kalliarekos said. To succeed in this approach, publishers may need "to take on more of an agent's role," he said.

Kalliarekos conceded that it is nearly impossible to predict what will work in fiction, but said that doesn't mean publishers can't take steps to minimize financial risk. A disciplined approach to paying advances is a publisher's best tactic to reduce risk, he maintained. He emphasized that "no matter what the competition does," publishers should stick to whatever limit they have set for themselves in paying advances. "There is a lot of talent available," he added. When publishers do sign authors, it is the authors that need to be branded, not the publishing house, Kalliarekos said.

Retailer Competition

Although Kalliarekos projected that publishing by retailers has the potential to decrease publisher revenue by 5%—7% in the near future, he did not criticize bookstores for entering the publishing field. Bookstores are "responding the way any consumer-oriented company would, especially since they are close to the consumer," Kalliarekos said. Barnes & Noble, for example, has identified profitable segments that it believes have been underserved by publishers and created products to meet those needs, he noted.

The question for publishers is not how B&N can be stopped, but how to compete with the chain, Kalliarekos continued. His answer: offer better products, and publish more heavily into areas where B&N does not have a presence. Barnes & Noble "won't be in every category," he noted. The greatest danger to publishers from retailers' publishing programs is that retailers will publish titles that compete with publishers' most profitable titles, creating what Kalliarekos called "a leakage of value."

Competition from retailers is not the only ongoing challenge confronting trade publishers. As did the presentation made by Booz Allen Hamilton at PW's first summit in 2003, Kalliarekos noted that young people are devoting less time to reading and more time to new media. Since 1984, the amount of time young people (college-aged and younger) spend reading has fallen from 500 hours annually to 250. Meanwhile, the time spent playing video games has increased from 100 hours to 500, and time watching television has doubled, to 1,000 hours. The Parthenon study also found that that age group now spends 2,000 hours on cellular phones, compared to no time in 1984.

According to Kalliarekos, one issue that trade publishers are not taking seriously enough is the growth of the used-book business, and he believes that business is "bigger than publishers think." Kalliarekos speculated that publishers haven't paid attention to the used market because it hasn't hurt their core businesses yet, although he noted that sales of used books could be one reason for the lack of unit growth in recent years. The expansion of the used-book business "is indicative that pricing is wrong," he offered. He also predicted that used books are likely to become a bigger issue, "particularly as the Internet creates more efficiencies" in the used-book marketplace.

He advised publishers to try to find ways to use the Web to sell not only used books, but to sell returned books as well, either directly to consumers or by working with Internet retailers. He went so far as to suggest that major publishers could band together to create a common Web site that would offer returned books for sale.

Publishers should be using the Web much more aggressively, Kalliarekos asserted, to manage their inventory and to talk to consumers. The Web is the best way for publishers to develop a direct relationship with readers, a relationship that isn't filtered by a retailer. Greater use of the Web by publishers brings the possibility of direct-to-consumer selling by publishers closer to reality, Kalliarekos said. Direct-to-consumer sales "is a challenging bridge the industry has to cross," but that doesn't mean publishers and retailers need to be in conflict with each other, he said.

Rethinking relationships with different accounts was also part of the afternoon presentation given by Booz Allen consultants John Frelinghuysen and Ed Landry. Frelinghuysen told the audience that publishers need to develop a better understanding of the financial demands faced by retailers. Publishers' sales and marketing strategies should by based on the particular needs of each account, Landry said. A customized approach to selling to different types of accounts can yield gains for a publisher's top line as well as the bottom line, Landry said.

Reacting to Kalliarekos's comments, Public Affairs publisher Peter Osnos agreed that it is critical for the publishing community to develop better relationships with its customers. "We need to break through conventional distribution and develop fresher and direct distribution models," Osnos said. He said book publishing "needs to find the equivalent" of what Netflix has done for the movies and XM satellite has done for radio. "Whether it's a subscription or some other way, we need to find ways to give books an additional life," Osnos said. Publishers would be doing their authors a "great service if we could find ways to use the Web to create communities" for writers, he said. "There are ways to add new distribution channels without eliminating the old ones," Osnos said, noting the publishing "can't afford to remain static."

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