"Lasciate ogne speranza, voi ch'intrate" (*)
-- Dante

In the following several paragraphs I am going to try to do what many have tried and failed to do before me. In order to help us answer the question "Does Literary Fiction Suffer from Dysfunctional Pricing?" I will try to summarize and explain the current financial outlook of modern book publishing in simple terms that anyone can understand.

Why is this so hard to do? Well, for one thing, the mind reels when trying to grasp the scale of any multi-billion dollar international business. It's easy to glaze over when looking at numbers that represent gigantic amounts of money in varying currencies. Any massive modern business will be hard to understand, but book publishing has two special characteristics that make it even harder to understand than, say, the automotive business or the fast food business. These are:

• That Odd Combination of Secrecy and Publicity

While book publishers are often publicly owned corporations or divisions and therefore must release financial reports to the public, these reports do not include the two factors that are most interesting to industry analysts: author advances and unit sales. These numbers are kept carefully secret, although it must be said that "book industry secret" is practically an oxymoron since the publishing community thrives on gossip and leaks. Author advances can become hot news items and are often hinted at in forums such as Publisher's Marketplace. As for sales, favorable numbers are often reported to the press, and the information service BookScan estimates book sales figures for its paying customers. The industry's odd combination of intense secrecy and rampant publicity creates a "smoke and mirrors" effect that makes it confusing to anybody trying to gauge its general health and profitability.

• Confusion Over What the "Book Industry" Is

Three people may be trying to answer the question "Is the book business profitable?" and might never discover that each of them are talking about vastly different entities. One may be talking about the giant international conglomerates that dominate global book publishing: Bertelsmann, Fox/News Corporation, CBS Corporation, Holtzbrinck, Pearson, Hachette Livre. Another might be talking about the divisions of these companies that publish commercial fiction (mystery, fantasy, romance, juvenile, literary, etc.) and general-audience non-fiction in North America, while a third might be talking about the business of publishing literary fiction in North America (we'll discuss the definition of "literary fiction" later). These three views of the business operate on such different scales that participants in these conversations become dizzy and confused and find no basis for agreement on even the most basic facts.

Here's a quick litmus test that shows what I mean: close your eyes right now and name a company that publishes books.

If you said "Bertelsmann" or "Hachette" or "Holtzbrinck", you are thinking about global mega-corporations.

If you said "Random House" or "Simon and Schuster" or "HarperCollins", you are thinking about the USA-based commercial publishers which are divisions of the global mega-corporations.

If you said "Farrar Straus and Giroux" or "MacAdam/Cage" or "Soft Skull" you are thinking about literary fiction publishers, which may be independent (MacAdam/Cage) or may be imprints owned by larger entities (FSG is part of Holtzbrinck).

It can help to imagine these three viewpoints as three Russian dolls, one inside the other. In the discussion that follows, we are going to attempt to provide a top-down overview of the publishing landscape from all three viewpoints. Our goal is to establish a sense of scale, size and relationship for book publishing, for fiction publishing, and for literary fiction publishing. Please note that I am not a professional economist, and that all of the statistics below are based on publicly available online sources whose accuracy cannot be guaranteed. Except where noted, all numbers below are supported by at least two independent information sources, and are also supported by anecdotal evidence from press accounts and from my conversations with countless publishing industry professionals. Please let me know if you believe any of these data items are inaccurate or misleading and I will post corrections or updates as needed.

With that disclaimer out of the way, let's jump in:

BOOK PUBLISHERS

Question: Is the book business profitable?

Answer: You better believe it. It's funny that many non-industry people assume that book publishing is a depressed or stagnant business. In fact, as recently as several months ago I wrote here on LitKicks that book publishing is generally an unprofitable business, to which my friend and fellow blogger Mary Delli Santi asked "Where did you get that idea?" My assumption was way off, and a simple look at the financial results released by the major media conglomerates sets the record straight.

Publisher: Random House (a division of Bertelsmann)
2006 Revenue: $2.6 billion
2006 Profit: $242 million
Source: Publisher's Weekly

Publisher: Penguin Group (a division of Pearson)
2006 Revenue: $1.56 billion
2006 Profit: $93 million
Source: Publisher's Weekly

Publisher: Simon and Schuster (a division of CBS Corporation, formerly Viacom)
2006 Revenue: $807 million
2006 Profit: $68.5 million
Source: Publisher's Weekly

What more does anybody need to know? Book publishing is a high-risk business, of course, but that's not the same as being a bad business. It is widely agreed among industry insiders that 2006 was a great year for book sales, and 2007 is shaping up just as well.

It's also an important point that book publishing is not just a profitable business -- it's a big profitable business. Before I began consulting sources like the Bureau of Economic Analysis for hard numbers, I was under the impression that both the film and music industries in North America dwarf the book industries, but in fact this does not seem to be true. I was not able to establish multiple sources for reliable numbers representing the global market size of all three industries, but I was able to put together from a variety of indicators a broad estimate of how these three industries size up in terms of annual direct consumer sales:

Music Sales (CD's, downloads, etc.)
Global Market: $30 to $40 billion
Global Unit Sales: 3 billion

Film Sales (tickets only, does not include DVD sales, television, etc.)
Global Market: $42.6 billion in 2006
Global Unit Sales: unknown

Book Sales
Global Market: $35 billion
Global Unit Sales: 3 billion

I'd like to get more definitive numbers, but various statistics suggest that, despite the popular perception that only eggheads and little old ladies read books, people around the world do spend roughly the same amount of money on books that they spend on music and movies.

So how do we explain this popular misconception, much discussed in recent newspaper a rticles and panel discussions, that the book industry is a money-losing mess?

Maybe it's because the competition for bestselling talent can lead to ruinous advances and highly visible (Thirteen Moons) failures. Maybe it's because the industry is still rocking and reeling from the changes brought about by the discount rates demanded by Amazon, Barnes and Noble and Borders. Maybe it's also because we read endless articles in newspapers and magazines about the "death of the novel" and various other publishing-world crises. Which brings us to our second Russian doll:

AMERICAN FICTION PUBLISHERS

Question: Is the North American fiction business profitable?

Answer:You better believe it.

The main data sources here are research institutions and information peddlers like the Book Industry Study Group, Dan Poynter's Book Statistics, Bookwire and Bookscan. According to Bookwire, more fiction books are published for the North America market than any other type of book. Here's the top ten by type:

1. Fiction = 13.9%
2. Juvenile = 10.7%
3. Sociology, Economics = 10.3%
4. Religion = 6.1%
5. History = 5.3%
6. Science = 5.2%
7. Medicine = 4.9%
8. Technology = 4.8%
9. Philosophy/Psychology = 4.7%
10. Arts = 3.9%

Only 13.9% of books published in America are fiction, but other statistics establish that an astonishing 55% of books bought by consumers are fiction. The discrepancy between these two percentages seems impossible, and yet numerous indications (not to mention much anecdotal evidence) point to the same conclusion. Does fiction sell? Fiction sells fine. It sells better than any other type of book.

Does this mean that it's easy to make money publishing fiction? No, because profit margins are low (textbooks, art books and medical books are much more expensive) and author advances are often through the roof. The fiction market is red hot right now, with seven-figure advances going to writers in various categories from horror to mystery to romance to literary fiction. But a red hot market means high stakes, and the big advances make it all too easy for a fiction publisher to blow a whole year on one bad bet. Still, as we said about the overall book business above: a high-risk business should not be mistaken for a bad business. Fiction brings in a lot of money for its publishers.

What kind of fiction sells the most? Romance and Mystery are top sellers, and and other highly active categories include Science-Fiction/Fantasy, Juvenile, Historical Fiction, Religious Fiction, Erotic Fiction, Military Fiction, Western, Adventure and Literary Fiction.

It's fascinating to study an individual large corporate publisher's entire fiction list, and in fact next week's installment in this series will feature Mary Delli Santi's presentation of a hypothetical book publisher's annual fiction list, so we can examine the actual performance of the sales model and examine the factors leading up to profit and/or loss.

And now, the third Russian doll:

AMERICAN LITERARY FICTION PUBLISHERS

Question: Is the North American literary fiction market profitable?

Answer: As far as we can tell, no, it's not.

It would be too large a digression to try to define "literary fiction" here (that's an entirely different discussion), so let's agree that literary fiction is the type of fiction that tends to get reviewed in the New York Times Book Review or other similar publications. It shares a fuzzy borderline with each of the major genres, and a more precise definition is not really necessary for our purposes here.

Does literary fiction sell well? Sometimes it does, and more often it doesn't. There have been big recent success stories -- The Road, Cold Mountain, The Kite Runner, Lovely Bones, but the small list of literary monster sellers can't compare with the wider list of genre fiction superstars from Danielle Steel to Stephen King to J. K. Rowling to James Patterson to Nicholas Sparks to Dick Francis to Janet Evanovich to Stuart Woods to Dan Brown to Christopher Paolini to Elmore Leonard to Terry McMillan to Lauren Weisberger to Michael Connelly to John Grisham to Tom Clancy to Michael Crichton to Patricia Cornwell. Our most celebrated literary authors and most acclaimed new novels often sell in the low five-figures (hardcover and paperback runs combined). Worse, books that are critics' favorites and even reader favorites often sell in abysmal numbers. Many literary novels, especially debut novels, never sell more than 2000 copies.

We'll have to wait till next week to see the projected numbers in Mary Delli Santi's hypothetical publisher's fiction list, which are based on all the publicly-available information Mary and I were able to find. Till then, we can safely say that literary fiction is one of the least profitable sectors of fiction publishing, even though it receives the most media attention and respect.

Let's come back next week for a more detailed look at fiction and literary fiction profit models. The purpose of this entry in the series is to make it clear exactly what we are trying to address with this entire two-month-long online conversation, which is titled: "Does Literary Fiction Suffer From Dysfunctional Pricing?". See you next week.