The Ebook Revolution Isn’t about Ebooks

I’m going way out on a limb here. I’m only a lay enthusiast in the field of economics, not an expert in the field, but I’ve got a middling amount of business experience in a variety of different fields, and a strange notion has been growing on my mind lately:

What if the ebook revolution isn’t about ebooks? What if, instead, it’s a symptom of a fundamental restructuring of most of the nature of market economies?

Here’s my line of thinking:

In getting any given market, you have three basic problems:
1) Discoverability
2) Awareness
3) Perishability

With food (and, as Dean Wesley Smith aptly pointed out, with books), the perishability issue is the most pressing. Turnaround has to happen fast, or the product spoils, either because of inherent perishability (in the case of food and pharmaceuticals) or limited shelf space (in the case of almost everything else), or because of changing demand (fashions, tech gadgets). But with digital products, and with manufacturing-on-demand, the marginal costs of production are much, much lower, so the tolerance for long-term return is consequently much higher, in economic terms.

With ebooks and POD, for example, I can write a book today, and even if it never breaks big, I’ll still be earning pizza money from it in thirty years. If, over that same thirty years, I stick to writing at a manageable pace, I’m building a passive income that will replace my regular household income, so long as I’m patient enough.

Discoverability and market awareness are the next big hurdles, but market persistence is the single greatest generator of market awareness. If you live in town near a hole-in-the-wall restaurant (assuming it serves a cuisine you like and has a sign that catches your eye), chances are very good that you will eventually have dinner there. Then, if you like it, you’ll eat there again sometime–maybe regularly. Coca-cola might spend billions on advertising every year, but all that money does is keep their logo visible. It makes them familiar–which means that you’re more likely to grab for a coke when faced with an assortment of unfamiliar choices.

In the collapsing global supply chain of the last thirty years, this has produced what economists call a “Matthew Effect.” The big brands get bigger, the little brands fade out. They fade out because they don’t make enough short-term profit to assure them of long-term product positioning that could build market awareness and enhance discoverability. The short-term profit problem is tied directly to manufacturing costs: to be on the shelf, you have to have cash outlay to produce a product. To stay on the shelf, you have to recoup enough to make the next round of perishable products, and you often also have to buy co-op space (where you pay rent for your shelf space) to the retailers selling your products. After all, if your product doesn’t move, they’re taking a bath on shelf space they could be devoting to brands that move faster.

In The Long Tail, Clay Shirky spotted that online retailing changes this to some extent–digital products and theoretically infinite shelf space mean that anyone can hang out in any marketplace for as long as they want, so long as their products aren’t perishable and the cost of carrying the product is near zero. He said the future consists of selling an increasingly small volume of an increasingly large catalog (i.e. instead of selling 5 cans of coke, you might sell 2 Cokes, 1 Pepsi, one RC Cola, and 1 7up).

As the long tail model has spread into the content industries (books, films, music, etc.), we’ve heard a lot of doomsayers talk about how the long tail will make it impossible for artists to get discovered, for movies to recoup their costs, for bands to afford studio time. And in some cases, these predictions have born out in the short term–but I’m beginning to think this is a temporary situation. Here’s why:

Corporate accounting philosophy, all things being equal, tends toward the short term. Stock price is based in large part on the perception that profits in the next quarter will match predictions, and for the stock price to rise those predictions and the reports validating them must show a certain amount of growth–otherwise, profit-seekers will move their stocks to other companies which appear to be growing fast. In other words, the stock market is a venue on which people with a short-term focus gamble on blockbusters. The previous generation of VCs, getting their start in the dot-com era, have mimicked this blockbuster mentality, looking for ultra-high returns on a short time horizon. And, in a world of blockbuster products, mass media, and collapsed supply chains, this sort of thinking was thoroughly reasonable.

But it’s also highly volatile. It’s the kind of underlying market conditions that create market bubbles. It creates an unstable economic environment, and a reluctance to invest, as eventually even the adrenaline junkies run out of tolerance for ultra-high levels of risk.

This is where I think ebooks come back into the picture. Take the slow-growth model I outlined above. Agonizingly slow growth, even. With digital products, having no manufacturing costs beyond the initial R&D, it’s a natural fit. It’s the one place where the long tail REALLY works, if you have the patience for it. And I think that this fact, coupled with one other, is starting to radically reshape the fundamentals of the world economy.

That other factor is something called “Just-In-Time Manufacturing.” The basic idea is that, for a product with an uncertain demand curve, you don’t manufacture products until they’re ordered. POD books are just-in-time manufactured, and advances in rapid prototyping, robotics, materials science, etc. are bringing JIT manufacturing to a number of industries. JIT Manufacturing means that you don’t have to have the huge initial outlay with the rapid-turnaround required to run your company. You have the ability to start small, even ten products or less at a time, and build your market penetration slowly. The smaller slice of physical shelf space you take up means you have more time on the shelves–and for Internet retailers, you never have to have a product physically in their warehouse at all. You can simply manufacture-on-demand (or have a subcontractor do it for you) and drop-ship the product.

This isn’t to say JIT manufacturing is suitable for everything. The per-unit costs are (and likely will remain) higher than large production runs. But those same technological advances that make JIT manufacturing possible also make it easier to retool major production lines to be product agnostic, so that as time goes by more major factories are available to run off BIG product runs of a number of things at a miniscule per-unit cost, rather than having one factory dedicated to one product.

Thus, as popularity grows, so does the profit margin. But the important part of this equation is that these technologies extend your “burn rate” (i.e. the rate at which you have to make back your initial costs) from 2-5 years to a scale of decades.

This business model is already a reality for some family-owned boutique companies, and for some Japanese megacorps. But the real revolution comes when this sort of thinking penetrates three sectors:
Big Creative (the major movie studios)
Big Finance (the VC/angel/investment banking community)
and Big Manufacturing (everyone else that makes tangible non-perishable products)

When that happens, everyone’s burn rate gets extended, and everyone’s level of risk exposure goes down on a per-dollar basis, because the discount rate on those dollars diminishes–if the project is internally financed, that discount rate can fall to near the level of inflation.

Practical results would include:
Large studios being more willing to finance niche-market entertainment.
Crazy-innovative disruptive technologies would get a longer exposure window in the marketplace.
Niche-market products becoming economical for giant corporations to manufacture (I’ve got my pie-in-the sky hopes for a revival of the Pontiac Firebird line, assuming GM doesn’t go belly-up again in the next ten years).
Drug development becoming more economical, as long earn-back windows become more viable (which translates to cheaper medicines in the medium-to-long term).

From my (admittedly limited) vantage point, the penetration of this kind of long-term, long-tail thinking into these large sectors is inevitable, both because of risk fatigue and because of the continually-diminishing marginal costs created by infinite shelf-space, JIT manufacturing, and easily retooled assembly lines.

The mass market revolution of the 20s-50s, after all, was created by the underlying economic realities of assembly-line manufacturing and mass media. The per-unit manufacturing cost was SO low on an assembly line compared to hand-making something, that artisan jobs shrank to hobbies, and the market access costs through mass media were SO high that only a well-financed company could even hope to have a chance.

But now, thanks to the convergence of the Internet with other communications technologies, the marketplace is atomized. Despite the temporary dominance of any single company (in the last twenty years we’ve seen Microsoft, Apple, Yahoo, Amazon, and half a dozen others all take their turn at market dominance in one space or another–there’s no reason to expect that the current apparent monopolies will prove any more resilient), then both the marketplaces and the products they carry will continue to grow more diverse. For companies and investors to continue to remain profitable (or dominant),they will be forced to move to more subtle and diverse ways of quantifying risk and tabulating returns; shifting some of their business to long-time horizon projects. And a long time horizon changes everything about the way the world currently does business.

I wish I could effectively emphasize how important this kind of a change is. The best way I know is to list companies that are characterized by this kind of long-term thinking, and that took a long time–often more than a decade–to achieve profitability. Pixar and Apple spring to mind as ones that you’ll all know. Bell Labs, Xerox PARC, and Edison’s Menlo Park are some others.

Because of all this, I think that what we’re seeing in publishing is a minor early symptom of a wave that’s in the process of altering the face of civilization as fundamentally as did the printing press. And, like that earlier revolution, it’s going to take a while to shake out–maybe a lifetime or two. Growing up in the late part of the 20th century, people of my generation had to learn to be extraordinarily impatient in order to survive. Now, the tables are turning. Entrepreneurs in the early 21st century now must learn patience and endurance. That goes double for authors and creatives–at least if we want to see our endeavors pay off (instead of winding up bouncing from one perceived failure to another because we can’t sit still).

Five or ten years or twenty years isn’t too long to wait to live off a passive income from ebooks. Our grandparents had a word for what we’re calling the worst-case income scenario of an indie author who sticks with it for the long haul: pension

I know these musings might rub a lot of you the wrong way. I could be completely wrong. Please do drop comments and arguments below (and please make them more nuanced than “the corporateocracy will never let this happen” or other species of that kind of fearmongering). The more I think about this situation, the more radical the outcomes look to me. Radical changes to the very economic ground we walk on are often tumultuous, uncomfortable, and terrifying. But the possible outcomes of this thing look better for those of us starting on a path of life-long innovation and creativity, whatever the industry, than the situation has in at least a hundred years–if not at any time in recorded history.

Assuming we keep our heads.

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8 Comments

  1. Good article as usual and some excellent and encouraging conclusions you draw from it. One part that immediately caught my attention were your enumeration of practical results. While those are certainly possible, I tend to doubt that many will become true. Big Creative, Big Finance and Big Manufacturing all have a significant drag against moving toward a long tail type of payoff; they need big profits to continue their existence. Further, they need big new markets to show a significant effect on their quarterly reports.

    One reason that large companies ignore upstart challengers is because those challengers are only generating small profits. A billion dollar company that sees a challenger growing its business to $50 million can’t be concerned. Yes, that challenger may double in size to $100 million and become a huge success, but it is still only a tenth of the money flowing through the billion dollar company. While not quite a rounding error, a 5-10% growth is merely expected and wouldn’t represent the same scale of success as it did for the challenger.

    The problem with long tail revenue is that it is usually not concentrated enough to be of interest to a Big organization.

    One good example is your Firebird. There is a thriving company that has continued making the Studebaker Avanti over the past years. They are working with original designs and updated mechanicals, but have maintained a profitable niche for a very long time. Certainly not enough to keep Studebaker running, but for the smaller scale, it was certainly fine. Better to look for a similar future for the Firebird than to hope that sales and profits will grow to levels that would support a GM.

    Drug companies are highly constrained by the patent laws that work greatly against a long tail revenue scheme. Once a patented drug becomes public domain after 17 years, any manufacturer can make that drug and select their own level of profit (with the normal race to the bottom). That means that the drug must earn back its development costs and all the costs of failed attempts at other drugs in the 17 years of a patent term for it to turn a profit. After that point, others will be making the drug without having incurred the research costs and will undercut the price.

    Innovative, disruptive technologies are also dominated by other factors. In addition to patents (and entrepreneurs love holding a patent on their development), they are continuously fighting for attention and hoping that the market doesn’t move away from their technology. It is very rare that a disruptive technology is in a secure market. Just as an example, look at the music player market. LP vinyl was displaced by tape that offered a choice in fidelity (tiny cassettes that were lower fidelity up through big reel-to-reel that was much higher fidelity). Portability won and cassettes with low fidelity displaced. Then CD appeared that offered higher fidelity and, eventually, matched cassette portability. That was challenged by digital encoding on tiny hard drives (or flash drives) at again lower fidelity. And now we appear to be shifting to streaming music at even lower fidelity than that we previously experienced with MP3s.

    Was there any time in that timeline that a disruptive technology could have waited decades to mature and for the market to recognize it and shift to it? The long tail doesn’t always work.

    The place where the long tail works most effectively is in the copyright arena and that is because of the very long term that copyright rights have expanded to. I don’t want to open the very contentious argument about the appropriate length of copyright and the necessity of works moving to the public domain, but the very long copyright term is what allows a company or author to keep earning smaller amounts over a very long time. Since we are discussing this in an ebook oriented forum, this is what most are familiar with.

    Copyright dominated industries can exploit the long tail most profitably because they can limit the rights of others to profit from a particular work over that long term. But working against that is the need for big profits to feed Big Media on a quarterly basis. The long tail is the patient bonanza for the individual or small team. They can license content over and over to Big Media and live with the smaller profits from year to year, and license it again later.

  2. JR–

    You raise a number of fair points, one of which points out the part of my reasoning that I’m least confident of, the other of which points up a part of my argument I didn’t articulate well.

    On the first point, that of the lack of attractiveness to large corps because of the diffuse money density of long-tail products, you may well be correct. I actually consider this the weakest point of my argument. To continue to play my own advocate (and don’t I look fetching in this pointy beard with a pitchfork), let me re-post it this way: As resources become less expensive to exploit, a diffuse resource base becomes more attractive. In mining, you see it with the rising value of new mining methods that can extract a greater percentage of resources even as the commodity price of the extracted resource falls because of rising availability. With something like beer, the rise of craft brewing has spurred large companies like Anheiser-Busch to move from a handful of products to literally dozens, each far more targeted at niche markets, so there exist already real-world examples of companies moving in this kind of direction. I suppose the real question is: How far will this trend ultimately go? And how fast will it go there?

    I personally am beginning to suspect that the trend is going to go EXTREMELY far, though I’m not expecting the revolution to play out quickly.

    On the other point, the one I didn’t articulate well…
    You mention that in your final paragraph that copyright-dominated industries are the ones best positioned to exploit this situation profitably. I completely agree. And I think you’re dead right about what it means for the small content provider. But for Big Media I think you’re wrong–they are already embracing the long tail (reluctantly, and some companies have already gone under due to recalcitrance–I suspect more bankruptcies and mergers and spinoffs await us in the next few years). Look at how many properties are being resurrected from the vaults and released to DVD or streaming. Studios make a far bigger percentage of their income now off of long-tail products than they do off their front-list blockbusters. It’s the stable ground the rest is based on.

    So, the point I didn’t articulate clearly is this: We’ve already come this far in the last fifteen years. How much farther is that going to go? So far, the long tail is making a difference to balance sheets, but not to front-office financing decisions. Will the ripples reach that far? If they do, I think the effects will be far more profound than anyone is prepared for.

    The other aspect of this point I didn’t articulate well is this:
    As JIT manufacturing becomes more economical, as rapid-prototyping becomes the norm (think 3D printing at xerox prices, electronic trace printing even cheaper, and bio-printing in the same price range–all three of which are a reality in the next ten years), the border between what constitutes a “Copyright dominated industry” and what is a traditional industry will disappear.

    Right now, perhaps 10% of the material world around us is software, and perhaps another 40-50% uses software to control its systems. But those ratios are already changing. What happens when 70%+ of the entire world IS software (or its end result)? In such a world, ALL (or nearly all) industries are copyright-dominated, and operate (at least in part) by the economic rules that software, books, and photography operate by now.

    Would love to hear more of your thoughts–or anyone else’s–on this! Thanks very much for coming by

    -Dan

  3. Dan, I first want to point out that I am entirely ignorant of this kind of legislation, but I’m wondering – what will the laws governing bio-printing be? Copyright or patent?
    Also, I think that only books have the kind of eternal long-tail lifetime that you’re describing. Barely anyone watches silent movies anymore, and even fewer still play atari games. Even when they do, it’s rarely because they were actually better, although some exceptions exist. I would rather play Super Mario Bros. 3 on my phone than the new (far too easy) versions, and Anchorhead still creeps me out, although that’s arguably more like a book.
    I DIGRESS, however. Books, as opposed to other media, have an almost eternal impact because of the simplicity of the media. Unless we invent something bigger and better than the written word, which allows for a variable length, individually experienced, universal medium for any kind of information via description, books will last until humanity itself dies.

  4. Hoopy–

    Whether copyright or patent will govern bioprinting is currently a matter of some dispute. IMHO, patents are FAR preferable, and are more appropriate. The trouble is that software is traditionally copyrightable, while engineering is traditionally patentable, but when you get into genetic engineering and other similar technologies, you have what is unarguably software, and yet also unarguably engineering. If patents win out, we will have a world FAR more conducive to rapid growth and technological evolution (because patents are limited-term protections, expiring after ~20years). If it’s copyrights, with the current effective indefinite copyright term, things could get very, very unpleasant for society as a whole.

    On the other bit…

    You’re right that most people don’t watch silent movies, but many people DO still watch old detective films, old westerns, John Wayne movies, classic horror, etc. And many people always will (even people for whom such films are not nostalgia). Just as some people still like Bach, or Beethoven, or Schubert and always will. Stuff that strikes the right balance between timelessness and timeliness tends to stick around forever (though I do heartily share your prejudice in favor of the printed word).

    Viva le biblioteque
    -Dan

  5. Hey Dan.
    Good point; there will always be niche markets, and if population keeps rising there will always be enough content to fill new ones. I just made the point about movies and games because books have reached the endpoint of their immersion level, and music is very close. Movies and games are still a (relatively) long way off, and until they reach that point, the older the presentation is, the more drastically outdated it will seem in the future. Today’s movies may seem as unwatchable as silent movies do today in the future (makes sense to me, but I’m sleep deprived) because the presentation breaks the immersion so much.

  6. You raise an interesting point. It will be interesting to see how things shake out 🙂

  7. One thing to keep in mind, if those niche products follow the long tail, that means that every corporation will benefit from having as many niche products as possible to build and maintain their bottom line. A wise company would continuously expand their base, secure in the knowledge that with a little bit of marketing, most will products become a constant revenue stream, and not simply a short term revenue boost.

    It would probably help if our economical model would forgo the quarterly reports that encourage short-term profits over long-term sustainable ones.

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