Like many software developers in New York City, I've done my time in the financial district. I was working on the 17th floor of the JP Morgan bank on 60 Wall (the building is now occupied by Deutsche Bank) when I started LitKicks, and I often used to write about life on Wall Street in those days. Since then I've left downtown Manhattan to develop websites for magazine publishers, record companies, television networks and litigation consultants, yet somehow these days I find myself back again in the skyscraper jungle on Manhattan's lower tip. I'm writing this from an office a couple of blocks north of Wall Street, where (in case you hadn't heard) they've been having a hell of a rough time.
From my vantage point as a Java coder in a cubicle, I can't tell what's wrong with Lehman Brothers and Merrill Lynch and the entire industry. I listened to televised sound bites last night from John McCain (who says America's economic structure is fundamentally sound, but charges that an "alphabet soup" of regulating bodies has the credit industry confused) and Barack Obama (who says we need better and more effective regulation). It's not because I work here, but rather because I have common sense, that I know Obama's answer is better than McCain's. We are dealing with the classic tradeoff between laissez-faire deregulation (McCain) and governmental oversight (Obama). Investment banks are collapsing due to bad loans, and I'd rather strengthen the regulating bodies than criticize them.
Why do banks make bad loans? Because loans are a source of profit -- both long-term profit (interest) and immediate profit (fees). As long as banks are issuing loans for long-term profit, they are likely to make good decisions. The problem arises when the short-term reward -- the money that changes hands whenever a deal is made -- becomes more of a motivation than the long-term reward. In recent decades, the USA's banking industry has moved significantly beyond sensible, earthbound business practices towards an unprecedented emphasis on perpetual growth and unnatural profit. The problems this trend has created transcend politics, and will not be easily solved. But at least Barack Obama's statements identify and address the problem. McCain's notion that our economic habits are fundamentally sound and that the problems can be solved by "cleaning up" governmental regulation rather than increasing the level of regulation amounts to complete denial that there is a serious problem that needs to be fixed.
2. Richard Wright, who played sublime keyboard solos and sang harmony vocals for Pink Floyd with a placid smile on his face, has died. Wright's proudest moment may have been the composition of "The Great Gig in the Sky", Pink Floyd's most heavenly song.
3. Frank Mundus, a Long Island fisherman who inspired the character Quint in Peter Benchley's novel Jaws, has also died.
John Ruskin was the most influential art critic in mid- to late-19th century England. Influenced by Romanticism, widely read during the Victorian and Edwardian ages, he published books about art (the voluminous Modern Painters), architecture (The Stones of Venice, The Seven Lamps of Architecture) and many other subjects. In total he published over 250 works. He influenced Tolstoy, Marcel Proust (who translated some of his works into French), and Mahatma Gandhi, among many and varied literary and political figures.
Today, Ruskin’s works are largely out of print or available in abridged versions only. However, one of his most enduring, and perhaps his best, books is still available: Unto This Last, not a book of criticism but rather a series of four essays on social theory. The name comes from the Parable of the Vineyard in the New Testament, where Christ says “take that thine is, and go thy way: I will give unto this last even as unto thee.”
Ruskin was deeply concerned about the plight of the working class of his time, who suffered under the harsh conditions of the Industrial Revolution. The classic writers of Political Economy, as the study of economics was known at the time, had published influential works on free-market capitalism. Adam Smith's The Wealth of Nations outlined the importance of the division of labor. J.S. Mill and David Ricardo published definitive works on Political Economy. The political economists theorized that economies were governed by laws of nature -- the law of supply and demand, and the law of self interest -- which could not be regulated by governments. The regrettable but inevitable side effect of these economic laws was that a certain amount of the population was destined to be poor. The role of government for the political economists was to set conditions favorable to the laws of self interest and supply and demand. The poor, on the other hand, were to be regulated by population control.
Ruskin found the ideas of these political economists abhorrent. He wrote the essays that comprise Unto This Last as a rebuttal in particular to J.S. Mill’s The Principals of Political Economy, the dominant argument for laissez-faire capitalism during Ruskin’s time. Ruskin published the essays as a series in a new magazine, “Cornhill”, which was edited by the novelist William Makepeace Thackeray. Public reaction to the works was so negative that Thackeray had to limit Ruskin to only four essays. Ruskin, although a political conservative and an advocate of the free-market, was labelled a socialist and worse. He assembled the four essays into a book and arranged for its publication. Sales started slow at first but began to climb towards the end of the century. Unto This Last would eventually become one of his most widely read works.
Why should we read Ruskin today? He writes with a flowery, sometimes difficult style, often tending toward purple prose in his description of art. But when you get used to his style, his writing is forceful and in fact beautiful. Still, even once we accept and begin to enjoy his style, why do we want to read a nineteenth century critic who went up against political economy? Global free-market capitalism has won the argument hands down. Or has it?
In Unto this Last, Ruskin set out to define wealth, and then to show that wealth can only be acquired under certain moral conditions, such as honesty and justice. The first essay, titled “The Roots of Honor”, outlines the problems existing in the relations between the employer and the employed, and states that the employer must deal honorably with his employees. Ruskin then proposes one of his most controversial ideas: work should be paid at an equal rate for a given job. He says:
The natural and right system respecting all labour is, that it should be paid at a fixed rate, but the good workman employed and the bad workman unemployed.
This means that two workmen, one more able or reliable than the other, cannot be played against one another to reduce the final price of the work. In that case, one worker will be paid less than the fair price, the other will not work. More just, according to Ruskin, is to pay the superior worker the going rate for the job. The inferior worker will still not work. Why is this more just? In the first scenario, both workers suffer. But in Ruskin’s scenario, the worker awarded the job is paid a just wage and is happy. The other worker is unemployed, but the total effect of the transaction is better than the first scenario. What is Ruskin’s solution for the inferior worker who is unemployed? First, all workers are to be educated, at the expense of the state, so that they have, in theory, the same skill sets. Second, government should set up manufactories, which would supplement the goods produced by the private sector, and provide jobs for those workers who have lost out on bids for jobs. The government would assure the quality of the work. As for honourable dealings with workers, Ruskin states that a master of a manufactory “as he would treat his son, he is bound always to treat everyone of his men.”
The second essay is titled “The Veins of Wealth”. Here Ruskin attempts to define wealth and to offer an alternative to the ideals of Political Economy, which he bills as the science of getting rich. Ruskin points out that under the political economist’s system, getting rich is always at the expense of someone else:
... the art of making yourself rich, in the ordinary mercantile economist’s sense, is therefore equally and necessarily the art of keeping your neighbour poor.
Ruskin then provides some simple illustrations that show that the accumulation of riches on the part of one member of a small society to the detriment of the others has the effect of diminishing the wealth of the society as a whole. Wealth is therefore a matter of justice:
The whole question, respecting not only the advantage, but even the quality of national wealth, resolves itself finally into one of abstract justice.
Wealth, according to Ruskin, is not accumulated material goods, but “power over men”, specifically power over men’s labor. Raw materials, even gold, are worthless without the labor required to extract them from nature. Wealth, to be just, has to be accumulated under moral conditions. And since wealth is power over men, Ruskin proposes:
... the noble and the more in number are over whom it [ the state ] has the power, the greater the wealth.
Perhaps is may even appear, after some consideration, that the persons themselves are the wealth.
National wealth is not built by a system of a few individuals getting rich at the expense of the many, but by the equitable sharing of riches among the greatest amount of citizens, and the bringing up of as many citizens as possible to the highest level possible in terms of education and intellect. Individual riches, as proposed by the political economists, are not beneficial to society as a whole, while just and honourable wealth is a benefit to all.
The third essay, “Qui Judicatis Terram” (“Who Judge on Earth”) deals with the idea of justice. To Ruskin, justice or injustice are inherent in all human economic transactions. Injustice in payment, in trade, in purchasing, puts the power exerted by wealth into one man’s hands, to the extreme detriment of the others in the transaction. But if the transaction is just, it has this effect:
The universal and constant action of justice […] is therefore to diminish the power of wealth, in the hands of one individual, over masses of men, and distribute it through a chain of men.
Ruskin then makes the statement wherein we see the result of just payment:
But the sufficient or just payment, distributed through a descending series of offices or grades of labour, gives each subordinated person fair and sufficient means of rising in the social scale, if he chooses to use them; and thus not only diminishes the immediate power of wealth, but removes the worse disabilities of poverty.
In other words, when men are treated and paid justly, we go from a society where the rich get richer and the poor poorer to a society where everyone has a chance to rise in economic status.
The fourth and final essay, “Ad Valorem” (“According to Value”) attempts to define value, wealth, price, and production in terms different than those proposed by the political economists. Value, in Ruskin’s terms, is that which leads to or supports life. Wealth is defined as “the possession of useful articles which we can use.” Mere possession or accumulation of objects is not wealth. Price is defined: “the quantity of labour given by the person desiring it [an object for sale], in order to obtain possession of it.” It should be pointed out that in industrialized societies, this labor is generally measured in money, not in kind. Finally, production is tied to consumption:
Production does not consist in things laboriously made, but in things serviceably consumable, and the question for the nation is not how much labour it employs, but how much life it produces. For as consumption is the end and the aim of production, so life is the end and aim of consumption.
Ruskin then sums up his economic philosophy as follows:
THERE IS NO WEALTH BUT LIFE. Life including all its powers of love, of joy, and of admiration. That country is the richest which nourishes the greatest number of noble and happy human beings; that man is richest who, having perfected the functions of his own life to the utmost, has also the widest helpful influence, both personal, and by means of his possessions, over the lives of others.
Pretty words, you say. Attractive ideas. But didn’t we agree earlier that global free-market capitalism has won? We in the U.S. have embraced the philosophy of Ruskin’s nemeses, the political economists, and have gone along with the idea that supply and demand and self interest should and will drive the economy, and that life under this system is good.
In what Ruskin called exchange, the trading of goods and services such that the goods are bought at the cheapest price and sold at the dearest, there is a winner and a loser. If the rich CEO of a corporation succeeds in driving down the wages of his workers in a labor negotiation, the CEO and the corporation wins, the workers lose. It is a zero-sum game. You might argue that the workers are lucky to still have a job, but they have lost nevertheless. Rather than “rising in the social scale”, as in Ruskin’s idea of a just economic transaction, they are sliding back. With constant inflation, a slide back, even a small one, is bad. The fact is that the United States is becoming a nation where the rich get richer and the poor get poorer.
Let’s take the example of a company driving down wages by sending jobs offshore. This is a classic example of what Ruskin calls the unjust employer. The unjust employer bids two workers against each other until the pay for the job is reduced to its lowest terms. The man who does the job is ill-paid, and the other man is unemployed. The case of offshoring has an even more unjust effect. The workers in Asia and India, by reason of their economic situation, are so cheap that no bidding is necessary. The job automatically goes to the offshore worker, and the U.S. worker is unemployed. What if the U.S. worker were given the opportunity to bid against the Asian worker, to meet his competitor’s price, and secure the job? He would lose money, because the amount that he would be paid, that of the Asian worker, would be insufficient to cover his costs.
I submit that it is worthwhile to read Ruskin, because he foresaw the problems of free-market capitalism well ahead of his time, problems that are now becoming glaringly apparent. Since he foresaw the problems, perhaps we can apply his solutions to our current economy. The just wage is a particularly good place to start.
Ruskin was concerned with the wages of workers in factories. Some economists are already talking about an “hourglass economy” in the U.S., with a large number of highly paid executives and professionals at the top, a large number of low paid workers at the bottom, and the middle class occupying the thin portion in between. This is a disturbing trend for the U.S., which has traditionally prided itself on a large and prosperous middle class. Unbridled free-market capitalism may thus achieve its ends to the detriment of the many and the benefit of a few.
What can we do? Here is where “we the people” need government. As Ruskin argued, the government needs to reign in the capitalist economy, because nothing else can. The die-hard capitalists say that the market will resolve everything, but in fact it won’t. Capitalism left to its own devices is having devastatingly negative side effects: the creation of greenhouse gases, the steady erosion of wages, and the depletion of natural resources, to mention a few. Up until recently, the United States government had done a fairly good job in keeping capitalism in check, and protecting the citizenry from its excesses. The “trust busting” of Theodore Roosevelt, the New Deal under Franklin Roosevelt, and the creation of the EPA to limit pollution are examples where the government has stepped in to curb unrestrained capitalism for the benefit of the nation as a whole. Lately, the U. S. government has caved in to the interests of the corporations, but if things get back on track, the government can, for example, place a tax on jobs that are sent offshore. The tax would slow down the rate of offshoring, and the money collected could be used to re-train those workers who were unemployed due to their jobs leaving the U.S., or otherwise help them find new employment.
Ruskin, in his later years, actually used his own money to implement some of his ideas. He founded the Guild of Saint George, an organization whose members would run businesses that paid just wages and treated workers fairly, and donated 7000 pounds and a tithe of his income to it. Ruskin argued that factories should be run by water power rather than steam, as he was concerned with the ill effects of burning coal. His efforts influenced Pre-Raphaelite artist and critic William Morris, who helped found the Arts and Crafts movement, a forerunner of the socialist movement in Britain.
Perhaps our current so-called leaders would do well to read John Ruskin's too-often-ignored book of essays Unto This Last.
How can I not like this book? It's a story about college-educated heterosexual male Jewish New Yorkers scrounging with hearts wide open for paychecks, love and, more than anything else, a path to peace in the Middle East.
The main characters in this book are all obsessed, absolutely obsessed, with global politics. One plumbs the contorted history of the Russian Revolution for meaning, another visits Jenin in the West Bank and shares a moving moment with a new Palestinian friend, and another writes an angry book about George W. Bush (it's called The Damage Done) and now contemplates personal ethics (the most difficult kind of all) while trying to figure out his next move. It's a charming portrait of people who remind me very much of myself about half a generation ago, when I was as old as these characters (luckily, since then I have found paychecks and have found true love, though the path to peace in the Middle East remains elusive as hell).
Keith Gessen is previously known as the editor of N+1 magazine, and I like this book more than I like that magazine. When Gessen writes directly about politics he tends to strangle himself in his own pessimism. But when he sketches portraits of himself and his friends strangling themselves in political nonsense, we are able to see the self-deprecating humor that can only mix uneasily with the declarative mode of expression.
Gessen also puts his close identification with Harvard University (where he went to school) into ironic play in All The Sad Young Literary Men. As Jews and Ivy League graduates, these characters must feel themselves doubly "chosen" (and thus certainly bound to disappoint their high expectations, whatever these expectations might be). They are also obsessed with fear of their youth slipping away. Anxiety is certainly this novel's top note.
But does it scan? Yes, and that's probably why the book seems to be gaining a following even among readers who are not Jewish male Harvard-educated New Yorkers. To the extent that this novel brings up serious issues, I'm sure this is a good thing. I'm not saying I'd like to read a whole lot of novels like this one -- one per decade would probably suit me fine. But I breezed through this book with much recognition and much enjoyment. Here's a little Sartre-esque passage I particularly like:
When you are twenty years old, and twenty-one, and twenty-two, and twenty-three, what you want from people is that they tell you about you. When you are twenty, and twenty-one, and twenty-two, and twenty-three, you watch the world for the way it watches you. Do people laugh when you make a joke, do they kiss you when you lean into them at a party? Yes? Aha -- so that's who you are. But these people themselves laughing and not-laughing, kissing and not-kissing, they themselves are young, and you begin to think, if you're twenty or twenty-one, when you are young, that these people are not to be trusted, your contemporaries, your screwed-up friends and girlfriends -- that it's not because of you that they kissed you, but because of them, something about them, those narcissists, whereas you were asking about you, what did they think of you? Now you have no idea. This is why it's so important to meet your heroes while you are young, so they can tell you.
Debut novels by Mark Sarvas and Keith Gessen: two for two. But how do they stack up?
Gessen has better cover art, and characters I relate to more (though I only went to a state school). Sarvas has the stronger laugh lines, I think, and the subtler flights of prose. Now let's see how far I get with Nathaniel Rich and Ed Park, if I have any time left at all to read this Spring.
They have got to be insane. Amazon's new E-Book Reader, the Kindle, is now out on the market. It's generating a lot of chatter from OUP Blog to Engadget to Gizmodo to O'Reilly to Silicon Alley Insider to Newsweek, where Steven Levy goes on at some length about the way this device may shake up the mess that is book pricing:
Although the general tone of yesterday's post might have indicated that a 10% year was a disappointment, I assure you that Simon Collins & Random Day's board of directors were pleased. We were just coming down from our high of Season One's 30% profit. But, a profit is a profit and we shouldn't sound unhappy about operating in the black. Now it's time to dig into season three.
Get ready for some big news, books fans. We've got two seasons under our belt and have learned a few things about the publishing industry. SC&RD has been doing well and word has spread about our profitable publishing program. As is often the case, though, our shareholders have been clamoring for higher returns. In response, our acquisitions editors have spent the preseason scouting for talent and signed a few big names for our next frontlist catalog.
Making a Killing at Thrilling
SC&RD scored a huge hit when we found debut author Lindsay Patterson Grisham. Being an unknown, we picked up her first novel for a song and it turned into a runaway bestseller. The story follows a washed up Triple-A shortstop as he is lured into a web of deception and danger when his brilliant and beautiful scientist wife is left at death's door after a horrifying attack. Marketing helped knock this one into the lights by giving away giant foam fingers promoting the book. We knew it would be big when we saw every agent and bookseller wearing them while wandering through the aisles at Books Exposed America. The stats:
- $25,000 advance
- 1,000,000 units printed
- 95% of inventory sold
- $7,621,106.67 net profit
Another smash happened after we lured an MVP away from Harper Schuster House. Rumor had it that F. Clive Follett-Cornwell was unhappy about the author photo they used on his blockbusting Interlude for a Murderous Symphony (Repairman Alex Plum Series #72). Apparently, his eyebrows weren't furrowed enough, so we offered him a huge advance and a celebrity photo shoot. Oh, happy day:
- $500,000 advance
- 750,000 units printed
- 90% of inventory sold
- $4,268468.33 net profit
Losing Literary Fiction
Although our thrillers did exceptionally well this season, literary fiction fell short of expectations. It all started when a bidding war broke out for Jonathan Frazier Ford. The acquisitions editor convinced our entire office of his literary prize potential, so we placed a huge bet on him. Turns out, his horse didn't run as his novel received mediocre press and negative stars from nearly every amateur reviewer on Amazoo. Not all hope is lost, though. Marketing is working on a plan to repurpose unsold inventory as doorstops to use as a tie-in for the next Lindsay Patterson Grisham novel about a Manhattan doorman on a killing rampage. The sad truth:
- $500,000 advance
- 386,400 units printed
- 25% of inventory sold
- $1,605,159.02 net loss
More bad news, books fans. SC&RD thought our list would gain some respect from the literati by signing seasoned author Alice Upjohn Oates. She put the literary into fiction nearly 30 years ago when she wrote We Were the Thirteen Suns, but we should have known something was up when she didn't blink at the modest advance we offered. Some of us scratched our heads when she delivered a manuscript consisting of the word "dog" 25,000 times, followed by 25,000 repeats of "god", and ending with "Thus, the sun set." The acquisitions editor was convinced her experimental novel would find an audience, but it turned into a fiasco when we were sued for copyright infringement by some blogger in Terre Haute. Eh:
- $50,000 advance
- 41,400 units printed
- 15% of inventory sold
- $214,915.00 net loss
A Tale of Two Product Lines
Since our thrillers and literary fiction had the most impact on the bottom line, we set up today's big spreadsheet to compare them. Besides the above winners and losers, the rest of our frontlist experienced a typical year. Some were very profitable, some were very unprofitable, while the rest broke close to even or lost money. Without further adieu...
Hmmm. A few significant numbers bear repeating:
Thriller (all titles): $13,049,880.34 net profit (33% profit margin)
Literary Fiction (all titles): $725,665.36 net loss (-10% profit margin)
Both Product Lines: $12,324,214.98 net profit (26% profit margin)
In the end, SC&RD still managed to make money despite so many red numbers.
Although we are running a fantasy publisher, don't forget that our financials have been based on real industry averages. When a book sells well, the sky's the limit because there isn't a ceiling on profits. But when a book is a dud, losses end at the initial investment. In the meantime, we can take our earnings from bestsellers and invest them in chasing the next big hit. Lather. Rinse. Repeat. One winner can help carry the company through the next season, but a whole lineup of losers will bury it.
It's the bottom of the ninth, books fans, and the last out looms. I'd like to thank Levi for the soapbox and the entire LitKicks audience for playing along. For my part, I had a lot of fun building Simon Collins & Random Day, and I hope everyone found this exercise to be both amusing and educational. Steeeeeeerike three!
And LitKicks says thanks right back to Mary for a very entertaining and educational three-day adventure. For those of you who'd like to keep enjoying her wit and wisdom, check Bookblog.net regularly.
Whither our book pricing discussion? We'll break for the weekend and gather next Monday to begin the "closing statements". We're definitely near the end. -- Levi Asher
As a fellow litblogger and avid reader, I have been following LitKicks' symposium on book pricing. Here and there, I've left comments on various threads to add my own take on the topics under discussion. Offline, though, Levi and I have had several spirited conversations about our passion for publishing. The result of our discussions will be revealed over the next few series of posts.
Publishing is a fascinatingly complex industry. An outside observer could easily come to the conclusion that nearly everything publishers do is dysfunctional to the point of wondering how any of them stay in business. Having been an industry insider, Levi has asked me to offer up what I know about the industry as a means of unraveling some of the mystery behind why publishers do what they do.
Who Am I?
Hello, LitKicks, my name is Mary Delli Santi. During the 90s, I spent 8 years working for a Chicago-based educational publisher. I handled operations for the international division and attended dozens of conferences which included Book Expo America (BEA), Book Expo Canada (BEC), the London International Book Fair (LIBF), and the Frankfurt Book Fair (FBF). I've seen more book deals than I can count and sat through more than my fair share of sales meetings. Although I left publishing in 1999, I still love books and have filled my house and life with them. However, I am very grateful to not have worn through a pair of shoes humping cases of books through the buchmesse at the just-concluded FBF. These days, I content myself as a reader and post occasional thoughts and host book discussions at my site, BookBlog [dot net].
Welcome to Simon Collins & Random Day
As a means of providing everyone with a glimpse at how the industry operates, I am pleased to present you with Simon Collins & Random Day, an ideal publishing company with the perfect publishing program! In a perfect world, every publisher would turn a profit on every book. Of course, we all know the world isn't perfect, but there isn't anything wrong with dreaming. What follows is simply a model to give everyone an idea of what the bottom line could be.
When book deals get made, the author's advance is usually expected to cover royalties earned over the course of a year. For example, if a royalty rate is 10% and the publisher expects a book to net $250,000 in sales over 12 months, they'd likely offer the author an advance of $25,000. Keeping this in mind, I have created a sample frontlist profit and loss statement for SC&RD, our fantasy publishing company. It's one in which everything works out exactly the way the editors expect. Each book earns back its advance and provides SC&RD with a hearty 30% profit margin.
Onto the numbers...
A Guide to the P&L Statement
Although most real publishing companies' profit and loss statements tend to be much more complicated, we've simplified our spreadsheet for use in this example. After all, this is a fantasy league and we're focused on the metrics needed to provide everyone with a clearer understanding of how real publishers operate.
For those of you who aren't familiar with reading big spreadsheets, the column headings provide a brief description of what's going on in each column. Following, though, is a more thorough guide to how we've set up our company:
Format: For our frontlist catalog, SC&RD publishes in hardcover and trade paper original. In addition, we also produce paperback reprints of last year's frontlist using both mass market and trade paper formats.
Genre: We're bestseller-oriented at SC&RD because we need to make lots of money for our shareholders. We love genre fiction because it usually sells well, but we also haven't neglected to publish some literary fiction for our more discerning readers.
Royalty Rate: Most publishers offer their authors between 10% and 15% of net sales, but we prefer splitting the difference and giving them all a flat 12%.
Advance: Our advances a calculated based on what we expect our authors to earn in royalties over the course of a year. A starving artist needs to eat.
List Price: We're not too greedy. Our books range from $7.95 to $29.95, depending on format.
PP&B: In general, publishing, printing, and binding (manufacturing costs) tend to be 10% of a book's list price. Ours is 12% because we've lumped in other incidentals like plates and shipping. No point in making an already big spreadsheet bigger by adding lots of columns.
Units Printed: This is the number of books we printed during the last 12 months. Could have been one print run...could have been multiple print runs. We're not worried about the little details because our eyes are on the sum total.
Printing Cost: PP&B multiplied by the number of books printed.
Marketing: We like to budget 5% of net sales to promote our books. As a result, the most successful ones tend to get more exposure and we like it that way. No point in letting a runaway smash hit miss a single eager reader.
Units Sold: We always sell exactly the number of books we need to sell to cover the advance we shelled out 12 months ago. Remember, we're fantasizing here.
Net Sales: SC&RD has an amazing sales force that sells into lots of retailers, including independents, big boxes, online booksellers, wholesalers, and warehouse clubs. For all buyers, the average discount off list is 55%.
Royalties Earned: In our fantasy publishing league, our authors always earn back their advances.
Royalties Paid: There's no need to pay any additional royalties in the first 12 months since we just sold exactly the number of books we needed to sell. Next month, though, the checks will be in the mail.
Overhead: You know, pesky additional expenses like salaries, facilities, catering for our all-day board meetings, etc. They tend to run about 20% of our net sales.
Net Profit (or Loss): Our net sales minus all expenses. As you can see, every book at SC&RD turns a profit so, honestly, "Loss" is completely superfluous.
Profit Margin: When we divide our net profit by our net sales, SC&RD always enjoys a healthy margin of 30%. It's nice to fantasize, isn't it?
And the Point Is:
Now that you've gotten a quick education in a publishing company's financials, we'll be using this P&L statement as a jumping off point for several different possible scenarios. We've done our daydreaming, but stay tuned. Over the next few days, we plan on presenting P&L statements for a typical publishing company, one having a good year, and another having a bad year. And when it's bad, trust me, it's bad.
Please check back tomorrow for the next section of Mary's presentation of Simon Collins & Random Day's publishing program. -- Levi Asher
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:
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
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.
LitKicks has asked a variety of book industry professionals (including publishers, authors, agents, editors, distributors, sales representatives, booksellers, librarians, critics and bloggers) a question: "Does literary fiction suffer from dysfunctional pricing?" Below is the record of a conversation that took place in September and October 2007.
Introduction and Project Goals
• Levi Asher
Phase One: Primary Sources
• Richard Nash (publisher, Soft Skull), Mark Sarvas (author, Harry, Revised), Scott Hoffman (agent, Folio)
• Simon Lipskar (agent, Writer's House), Keith Arsenault (sales, PGW/Perseus), Dave Weich (marketing director, Powell's)
• First Week Summary by Levi Asher
• David Poindexter (publisher, MacAdam/Cage), Danielle Marshall (marketing/promotion, Powells), Kelly Nagle (librarian)
• Alan Sorensen (Graduate School of Business, Stanford University), John Freeman (President, National Book Critics Circle), Ami Greko (marketing director, Folio Literary Management)
Phase Two: Debate and Discussion
• The Case for Change by Levi Asher
• Sarah Weinman (book critic, blogger), Tao Lin (author, Eeeee Eee Eeee, Bed), Ron Hogan (author, The Stewardess is Flying the Plane!, blogger)
• Simon Lipskar (literary agent, Writer's House), Kassia Krozser (blogger, Booksquare), Doug Seibold (publisher, Agate)
• The Pleasures of Paperbacks by Jamelah Earle
Phase Three: Statistics, Estimates and Models
• Figuring Out the Book Business by Levi Asher
• Fantasy Publisher League, Part One (A Hypothetical Fiction Frontlist) by Mary Delli Santi
• Fantasy Publisher League, Part Two (Simon Collins & Random Day's Typical Year) by Mary Delli Santi
• Fantasy Publisher League, Part Three (Ups and Downs in Simon Collins & Random Day's Third Year) by Mary Delli Santi
• On Critiquing the Industry by Levi Asher
• Finale: A Plea From Paperback Readers by Levi Asher
But why argue theories and generalizations? Let's take a stroll through our neighborhood bookstore and see what our industry's book pricing practice looks and feels like to "the boots on the ground".
This is a quirky novel by a writer who appeals notably to a hip young audience. Assuming these hip young potential book buyers are accustomed to downloading songs for a dollar each, they'd have to expect this book to be worth twenty-seven good songs in order to take a risk on it. Way to grab those impulse buyers, HarperCollins!
This is a smart literary novel that explores issues of class and African-American identity in a campus setting. The book got moderately good reviews in many newspapers, but the author is not a household name and the book will be a marginal buy for most potential readers. At $26.95, this ought to fly off the shelves!
1. Soft Skull, probably the best alternative/independent publisher in the USA right now, is being sold and merged into a large holding company managed by Charlie Winton, who has also acquired Shoemaker & Hoard and Counterpoint.
Once again, I'm disappointed that not many of my fellow bloggers seem to be paying attention to stories like these, because the Soft Skull news has not made much of a ripple. Are literary bloggers afraid to write about finance? Can it be that nobody thinks this is relevant news? Google Blog Search turned up only one blog post following GalleyCat's story, and I just don't understand this.
In sounding alarmed about the news, I'm not trying to cast negativity on the business decision Richard Nash and Soft Skull's management team have made. I think very highly of this team, and if any executive can continue to squeeze greatness out of Soft Skull under the watchful eye of a corporate finance overseer, Richard Nash is that executive. But I have to say that I'm worried, and I'm skeptical. Even if Nash succeeds for a while, don't corporate mergers always end at the same sad cul-de-sac, when eventually the winds change?
I wish this team good luck, but ... thank god City Lights and Akashic are still independent.