Zombie industries are all around us–these are businesses whose models have ceased to be relevant and they’re just waiting for something better to knock them over. This doesn’t mean they’re not still earning money–some of them are earning quite well, thank you. And it doesn’t mean that they’ve been artificially resurrected with government stimulus money, although those certainly seem to be zombie-like.

No, I’m talking about industries and businesses that don’t yet know they’re dead. The ones whose future demise is as certain as the next big earthquake: we don’t know quite when, and we don’t know quite where, but the prospect that somebody will huff and puff and blow the house down has a probability of 1.

There’s a pretty reliable way to spot a zombie, and it’s on display everywhere in publishing right now. This summer, I’ve seen it everywhere from PW to BEA to some of the audio leaking out of WorldCon to Litopia (where it’s becoming such a regular feature that I’m beginning to think that the otherwise erudite, urbane, and thoroughly enjoyable panel have all been sniffing from the same glue barrel). It’s predictable, it’s boring, and it’s the thing that will, in the end, make publishing go the way of the music industry (hopefully not the buggy whip industry, though that’s always possible):

An entitlement mentality.

In other words, when faced with changes, the industry starts talking about “value” as if it’s something intrinsic. They talk about falling prices and lower barriers to entry “cheapening” the “reading experience.” They talk of the problem of “wading through the crap” and of falling advances, and fret about how agents and publishers and writers are going to make a living.

As a writer who’s currently pursuing multiple release avenues for his work, I’ve got a vested interest here. I want to get paid for my work, more than I get through my tip jar (though, if you do drop cash in the tip jar or buy books through my Amazon links, thank you!) or through selling tech articles. I’ve never made a secret of the fact that I’m in this game for the money: I love telling stories, and I want to make my living at it.

But, I do not deserve to make my living at it, unless I can find the people who want the stories I have to tell. All businesses, of all kinds, exist for one reason (and one reason only): because they meet a market demand.

The Real Cost of a Book

Michael Shatzkin has gone over what the margins are on differrent types of books at different pricing structures, and it gives an idea at least of what publishers report their margins as.

Michael Stackpole has also done a whole series on ebook pricing, during which he makes the point that what costs are involved in ebook production could be drastically reduced if publishers would move their operations out of New York. Not only would they be able to reduce overhead and salaries without reducing quality of life for their employees, they’d also be in a position to get out of their rather expensive mafia-controlled (not kidding) shipping contracts, and their complicity in money laundering (a plus all around, I’d think).

Suffice it to say, the marginal cost on an ebook is 10-20% less than on a mass market paperback, without factoring in returns. More units sold equals lower marginal costs, while the per-unit profit grows accordingly. And that’s without moving anyone out of New York.

So, if you’re going by costs, an ebook should cost, at lowest, around 20% less than the mass market paperback of the same book.

But, believe it or not, I don’t think this matters at all.

Literary Conceit

To explain why I think that way, I have to walk you through a bit of Econ 101.

A market is anyone willing to trade, and there are a lot of different markets out there. Writers have, for years, been marketing to publishers, not to fans. We sell, or don’t sell, according to the tastes of editors. Most editors have pretty damn good taste, others not so much, but their job is to acquire books that they can sell to their market: the people who buy books.

You see a problem built into the system already: other economic considerations aside, because only a certain kind of person has the temperament and bearing to be an editor (it is, after all, a highly political job best suited for well-educated, intelligent, personable people), the books made available to the customer will appeal to only a limited subset of the potential reading audience.

As a multi-NYT Bestseller told me a while back (and no, I’m not saying who): “Fans? I don’t give a damn about the fans. I can’t afford to. I have to keep my editor interested if I want to keep writing.”

So, in books, the consumer is not the customer, which is (to put it mildly) kind of perverse. But, just as with the music industry, digital product is changing where the power lies and putting it where it belongs: in the hands of the consumer.

The consumer is, after all, the ultimate end of the supply chain. Giving them the proximate power means that a lot of the rest of the economic model of publishing has to shift, or it won’t last. And the consumer sets the price in any market. If a consumer doesn’t buy an item because the price is restricted, it’s overpriced. If the price of an item induces so many people to buy it that it creates a supply shortage, the price is too low. All businesses, whether they realize it or not, set their prices to take advantage of a sweet spot where they get the most profit possible per unit (well, not all businesses do this. Those who are unable to find this price point or control their costs so they can live at this sweet spot go belly-up pretty damn quick).

But, of course, some writers, agents, and publishers think they’re indispensable. They are the curators and bastions of culture, after all. If it weren’t for them, we’d all be awash in the lowest form of vulgar entertainment. There’d be no place for art (this is a nearly-verbatim paraphrase of a line I heard recently on a well-respected literary talk show).

This also is a huge crock of shit. Charles Dickens and Victor Hugo were paid by the word. Poe wrote for money and was considered a hack. Shakespeare was vulgar popular entertainment. There is no qualitative difference in the recipe of art versus schlock that any of us can see now, though an entire industry (critics) exists to try to hide that basic fact. The difference between vulgar entertainment and high art isn’t the intention of the writer, the heart she puts into her story, or social consciousness. The only difference is “What are people reading a hundred years from now?”

The stuff that ages well, that stays relevant and motivates people to keep recommending it, reading it to their children, and passing it on—that’s art. That’s the stuff that’s hit something vital in the cultural soul. The rest of it is just vulgar entertainment (some of it transcendentally beautiful entertainment, some of it boring or crappy as hell—your mileage may vary).

Writers. agents, and publishers (in common with other successful businesses) also tend to believe that they deserve their position. They don’t. Markets are fickle. You deserve where you are today because you earned your way there by meeting a market demand and being relevant–you don’t deserve to stay there tomorrow unless you’re relevant tomorrow.

I don’t care if that’s not fair (and I also actually don’t like it, because it means my retirement probably isn’t ever going to happen), it’s the way life works. As Doni Kollin (whose day job is as an economics professor) said to me over a drink recently, “In business, as in evolution, the big don’t eat the small. The fast eat the slow. And the big guys are usually slow.” If you’ve grown big, you have to be more competitive, not less, because the young-and-hungry are nipping at your heels.

For a recent parallel, look at the IT world. Fifteen years ago, Microsoft ran the world, Netscape was dead, Google didn’t exist, and Apple was on the verge of bankruptcy. Now, Apple is the biggest IT firm in the world, Google runs the internet, Firefox is the most popular browser, and Microsoft no longer defines the industry. This is what happens in a normal ecosystem.

So, How Do I Spot a Zombie Again?

Zombie businesses and industries suffer under a trio of delusions:

1) They’re indispensable.

2) They set the prices.

3) They deserve their position.

Not one of these things are true.

The notion of indispensability depends on the assumption that “The way we do things today is the optimal way.” It’s almost never true. No industry—not the oil industry, not the auto industry, not the banks, not farming, and not writers—is indispensable. All of them exist because they meet a market demand. Sometimes, that market is lobbyists, governments, editors, ad executives, or the teeming masses of humanity—but if they stop meeting that demand, they stop existing. Once a business starts thinking they’re indispensable, their days are numbered.

Consumers set prices. There is no such thing as “intrinsic” value. An item is only worth what people are willing to pay for it. If you price ebooks at $15.00 a unit, as many people will pirate them as buy them. Price them at $3.00-$5.00, most people will buy, not pirate (because pirating is more trouble than buying at that price), and your aggregate profit margin will be better. Start thinking that you control your product’s price, and your sales are going to fall.

And as far as deserving one’s position? Don’t make me laugh. The more open a market gets (and by ‘open’ I’m talking transparency as well as freedom), the more meritocratic it gets. The people who succeed are those who meet the needs of their consumers. Period. You don’t meet those needs, you fade.

So, no, I don’t think it matters how much it costs to produce an ebook. It only matters that there are some people and businesses who are willing to take the risk and bear the costs in an attempt to meet a market demand, because if they meet the demand well, their marginal costs will go to near-zero.

The Real Meaning of eBooks

Economists have a term for what happens when a new player enters a market and, through innovation, changes the fundamentals of how it works: creative destruction. By making old ways of doing things obsolete, or by creating viable persistent alternatives, growth happens in a marketplace. Opportunity is created. Sometimes, the fabric of society is radically transformed. Almost always, this means that folks wedded to the old paradigm are in for a rough ride.

Now, in the publishing world, the barrier to entry is so low that thinly disguised fan fiction writers can have a shot at the market. It is, truly, turning into a slush pile out there. But that’s not a bad thing. Some of those slush writers will succeed brilliantly the same way Rodriguez and Tarantino did with independent film as outsiders. Most won’t.

Why? For the first time ever, fans matter in a measurable way. Sampling, podcasts, any one of the now 31 (and growing) genre-friendly, pro-rate paying e-magazines, and market innovations such as Stackpole’s Chain Story help customers discriminate between good and bad product. They build reputations. Reputations matter.

But there’s another, even better effect of having the barrier to entry set very low: there is room for literally thousands of new niche markets to develop. Just like what cable did to TV, just like what the internet did to music and radio, so too e-readers and smart phones and POD and open marketplaces are doing to literature: filling out the bell curve, feeding pent-up demand in sectors that were previously under-served, and providing opportunities for oddballs like me to find audiences who really want us.

Viva la Revolución!

This post has a follow-up, which you can find here.

Copyright 2010 J. Daniel Sawyer

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