INDUSTRY AND EXTERNAL ENVIRONMENT ANALYS: PUBLISHING
Industry and External Environment Analysis: Publishing
This assessment will cover the internal and external consideration which affect the current and forecast performance of the publishing industry. For these purposes the publishing industry will consist of those companies which publish newspapers, periodical magazines, revues, reports and other publications, books and directories (Bureau of Labour Statistics, 2014). These publications may take the form of print, digital media or any other distributable format. Taking the current environment into consideration a large part of this analysis will be concerned with the effects of new media on the traditional publishing world. How new methods of delivery, and consumer interaction with the publishing world have effected profitability and created new opportunities and challenges for firms in this industry.
Overview of the Publishing Industry
For the large part of the 20th century the primary method of selling published products was through the subscription system wherein a large mailing list of customers would be kept, paying an annual or monthly stipend to receive books, newspapers of magazines. Or through bookstores, points of sale through which consumers could purchase more specific materials. Traditionally the industry has seen high rates of growth, initially explained by increasing literacy rates even by the 1980’s in America where this had stopped being as big of a contributory factor the rates remained at a healthy 4% (Rusch, 2014).
Prior to the current period, the industry model could roughly be described as, writers providing content to publishers. Publishers would then be tasked with editing and improving upon the work provided, putting it in an appropriate design and format, and establishing a production cycle establishing the length of a production run and the number to be produced. These would in turn be given as finished books and/or periodicals to bookstores or self-distributed them through a subscription network (Greco, 2005).
Increasingly however this established system has been turned on its head by the emergence of the digital distribution model, eBooks, online-only magazines, professional blogs and self-published novels have altered the landscape of the industry as it was known. However the largest firms in the industry have remained, the so-called big six publishing houses Simon & Schuster, HarperCollins, Random House, Hachette, MacMillan, and the Penguin Group (Fictionmatter.com, 2010). Newspapers continue to provide the majority of employment in the publishing sector the biggest content providers being Gannett, Knight-Ridder, Tribune Company, Dow Jones, The New York Times Company, and The Washington Post Company (van Kranenburg, 2004). This is despite declining profits and circulation figures year-on-year, increasing competition and uncertainty in the long-term future of traditional media contributes to the pessimistic view on the future of this once-essential part of the publishing industry.
Despite this pessimism regarding traditional print, the digital arm of most publishing media companies is providing new opportunities for growth with 88.45% of US publishing executives in a recent poll saying their companies’ digital revenues are expected to increase in 2014 (Cxense, 2014). The main difference between the profit model of books and editorial/newspaper publishers is the reliance of the latter on advertising revenue. This has become increasingly apparent as importance of the subscription model has fallen with the move towards an online model (Emarketer, 2014). Even with this growth, online advertising only makes up a small portion of the 44 billion dollars spent on media advertising in total.
Five Forces Analysis
The threat of entry of new competitors. Traditionally there were many barriers to entry facing prospective investors in the publishing industry. Capital was required to fund the large number of trained staff required, the warehousing of books or periodical inventory. Investment in printing presses, both self-owned and operated as is the case with most firms in the newspaper industry. Or manufacturing services procured through fixed long-term contracts with established printing companies ensuring ease of supply. With large publishing houses already holding a lock over these resources and thus the advertising revenue and consumer dollars brought through them, new firms looking to enter the market were met with great difficulties.
In the 21st century the internet through digital print allows access not only to a relatively lowly capital intensive means of publishing and distribution. It allows niche firms to target specific customers with their goods thus marketing to segments which large firms in the industry cannot target in the same way. This content can be browsed through virtual shop fronts by prospective customers with warehousing contracted out to specialist companies (Fillmore, 2008).
Developments in new forms of publishing are largely to the detriment of smaller firms rather than large established industry players which operate at a different level of competition. Industry data shows that the rivalry between these firms for the majority share in the industry is extremely competitive, in the US this power is concentrated between only eight firms with the top four firms gaining 41.8 percent of the total revenues for the industry (Greco, Rodrigues and Wharton, 2007). Thus, while there are certainly opportunities for small and niche entrants into the industry, prospects for market share capitalization will be limited. Profits for these competitors will be dependent on the ability to market to specific market segments.
However growth rates in the publishing industry vary according to the sector being invested in. Newspaper growth has steadily declined, whilst the trend in trade, mass market and educational publications is expected to increase by 10 percent in the next four-year period (van Kranenburg, 2004)). So increasingly fierce competition is likely to be expected amongst niche and academic publishers.
Threat of substitutes. The biggest threat that has been posed to publishing media its online form, has been the growing proliferation of entertainment alternatives available. Books, magazines and newspapers are subject to changing consumer trends that have taken place over the last twenty or so years.
Newspaper publications have been met with competition from 24-hour news channels which provide viewers with a constantly updating view on current events. Additionally new media found on the internet such as blogging and editorial based personal websites provide similar content to what would otherwise only be available from traditional providers of news. Whilst newspapers operating on a subscription model charge a fee to consumers, however minimal these television based alternatives are free, with the costs being completely borne by advertisers. Additionally the consumption habits of media users are changing, adopting a multitasking approach, using one form of media to supplement consumption of another (Van Weezel, 2014). The net effect of this is that whilst newspaper subscriptions may be maintained the use of their online alternatives is not a primary complement, instead it one of many additional means utilized by consumers to receive their news.
Book and magazine publishing has been met with similar challenges, it finds itself competing with television, internet, radio, and social media in monopolizing consumer interest. This change in the availability of substitutes is reflected by the fact that the total number of hours spent reading by people over the age of 18 dropped from 123 hours a day in 1996 to 107 hours a day in 2004 (Greco, Rodrigues and Wharton, 2007). Alternative formats of being able to obtain books also took away from potential publisher revenues, by the 1990’s an organized and effective used textbook market had grown up around college campuses, which was only enhanced through the availability of listing and distribution systems provided by the internet. This approach was so successful that profit margins for used books were are actually 8 percent higher than for their original counterparts (Greco, Rodrigues and Wharton, 2007). By 2006 the lost revenues estimated were nearly 2 billion, and with increasingly sophisticated methods available for obtaining used copies such as online book depositories this figure has only risen in the interim period (Greco, Rodrigues and Wharton, 2007).
The Bargaining Power of Customers. In recent years one of the largest factors affecting the ability of large publishing houses to dictate prices to their customers, has been the emergence of another link in the distribution model, this model is best represented by the face of Amazon (The Economist, 2014).
As the importance of online distribution began to gain traction in publishing circles it was determined that a method for reaching customers was needed. Into this void stepped Amazon, offering a pre-existing structure for warehousing and a loyal consumer base which would find a great ease of access in Amazon’s virtual shop front systems. The sale of eBooks was also beginning to form a vital part of book publishing’s growth strategy by this time. Thus with the advent of Amazon’s Kindle in 2007, publishers were provided with a readymade product allowing them reach customers with a relatively new format quickly. The net effect has been a eBook sales achieving near parity with sales of hardcover books 457 million e-books were sold vs. 557 million hardcovers (Flood, 2014). With this power Amazon has been able to dictate prices to publishing houses setting a fixed price point of $9.99 for all book publishers, a very attractive price for consumers but arguably underpriced from a publishers perspective.
This effect was compounded by the large physical book retailing chains such as Barnes and Noble forcing out smaller independent bookstores. These consolidated retailers were able to dictate consumer preferences through the placing and marketing of specific titles. With this increased power they are able to dictate the price of hardcover and softcover titles, further reducing publishing industry margins.
Through the use of social media and other online sources consumers have a far greater availability of information and are thus able to make more complete choices when choosing books, in terms of price and quality. Piracy has also played a part in increasing consumer power with an ability to obtain books free of cost due through the internet.
Bargaining Power of Suppliers. There are two main suppliers to publishing firms, the providers of content being the writers and the providers of manufacturing capabilities being printing companies.
The bargaining power of the former is largely dictated by the availability of resources such as ink, paper if these are in short supply then printing companies can dictate prices, knowing that there are scarce alternatives available to publishing companies (Greco, 2005). In traditional publishing the role of writers has diminished over time, there is no longer the same public demand for specific personalities or journalists as the environment has changed. Only a select few authors are given large advances and only then if they are established names guaranteed to draw customers. Thus the power of these suppliers has diminished despite the book industry showing steady growth.
In the face of these challenges self-publishing and new media have brought greater flexibility to authors and journalists. Providing them the flexibility to switch from traditional publishing houses towards new models. Indeed the self-publishing industry has seen growth, up 79% to 18 million self-published titles purchased, worth £59 million in the UK in 2013 (Flood, 2014). With print sales falling in recent years and eBook sales rising the increasingly sizeable chunk this avenue allows writers to pursue forward integration, increasing their power in the market. Blogging and websites created as journalist cooperatives also provide an alternative to newspaper and magazine publishing through traditional channels. This ability to pursue alternative means signifies that the customary model may well be threatened in due time as these methods begin to eat into the advertising and sales revenue of large companies.
Rivalry amongst existing companies. Total revenues of the book publishing industry for 2004-2009 period in the US hovered annually around 26.45 billion dollars. However net growth in revenues were only projected to grow 17.38 percent which adjusted for inflation meant a very slim rate of growth in publishing as a whole (Greco, Rodrigues and Wharton, 2007). The continuing effect of book returns at full credit also worked to act against potential profit margins. As detailed above these revenues were largely shared amongst only a few firms, with the top 50 companies making up a whopping 80% of the market share. This rivalry was particularly pronounced in the trade and book sales segments (Greco, Rodrigues and Wharton, 2007).
Companies looked to gain a competitive through two primary means, product differentiation which was a tactic employed by Random House to dominate the US market promoting a focus on a variety of genres, and consumer targeted publishing. Or through a cost leadership position displayed by Scholastic and Penguin in the mass paperback market niche (Greco, Rodrigues and Wharton, 2007)..
Profitability of Industry
The publishing industry like many other has been subject to the effects of recession in the past 10 years. The global revenues of the largest publishers have ranged from $8.6 billion to $9.7 billion since 2006. Whilst the rise in eBooks has helped keep profits at a respectable level however due to the lower costs involved. In comparison to high profit industries such as pharmaceuticals and software which exhibit margins of 20%, publishing ranks somewhere in the middle of the pack roughly 9-10 % in revenue growth since 2006 (Greenfield, 2014).
Whilst on the surface these returns would be considered acceptable for an industry, they still do not match those seen prior to 2006. In this context industry experts had little faith that advertising and subscription revenues from news and traditional print media would ever bounce back. Despite this 76.8% of writers and suppliers express more faith in traditional publishing than the alternatives offered through self-publishing (Cxense, 2014). Thus the continued success of the publishing industry is to a large extent dependent on its ability to be able to keep abreast of rapid technological changes and adapt their business model to new platforms and means of distribution.
In terms of global trends some changes can be seen in the concentration of major markets for publishing. Whereas before only North America and Europe were considered centers of the publishing industry recent data has shown that China has become the second largest book market in the world. However China, along with other emerging markets such as India and Brazil are not staking their future on traditional print media, increasingly it is digital print which is comprising the bulk of sales in these countries (Wischenbart, 2014). With new entrants into the market placing a renewed focus on establishing accessible virtual points of sale, and worldwide distribution channels for their digital media.
The current trend in publishing industries seems to be consolidation, in the book publishing world Penguin merged with Random House. Whilst in the News industry Rupert Murdoch’s News Corporation acquired Canadian Harlequin. However analyses reveal that it is not these traditional big players which are dominating the industry, instead scientific and educational publishers find themselves cornering the revenue stream in recent years. These common theme amongst these publishers seems to be a move away from traditional revenue models, with an increasing digitization of their value chain or implementing a subscription based revenue model for the sale of books (Wischenbart, 2014).
Recommendations
The disruptive innovation wrought by digital media has been the biggest change in the prospects of the publishing industry. How they react to, and are able to stay ahead of this change will determine the ability to remain profitable and viable in the long-term. The industry has already hitched itself to Amazon, however alternatives such as Apple and the iPad must be considered, there must be a diversification of platforms to provide the most content to the user. Indeed this diversification may prove to be necessary as retailers like Amazon and Barnes and Noble gain more power to dictate prices.
It is not only through moving to digital channels that publishers will maintain profitability, an effort must be made to optimize their own digital distribution models. As large firms consolidate there is the potential for great economies of scale if buyers can be persuaded to switch from traditional retailers to publisher established points of sale.
For newspapers a large part of their evolution will depend on not only on adapting to, and monetizing new means of distribution. Whether this is through online subscription models or, as is looking more likely by maximizing advertising revenues through the use of consumer clicks and data streams. Newspapers will have to look towards product differentiation in order to separate their product from that provided by other online services. This could be achieved through a focus on longer-form investigation, more opinion pieces and a greater focus on reader interaction through comments sections and moderated debates.
In all cases social media should be utilized as a tool to reach a greater market in, it is also a great tool for market research which can be used in targeted advertising campaigns. The profitability reports show that niche publishing is increasingly becoming the leading force in the publishing industry, a greater knowledge of consumer desires through social media integration into the marketing process can facilitate this.
BIBLOGRAPHY
Bureau of Labor Statistics, (2014). Career Guide to Industries, 2014-15 Edition. Washington D.C: U.S. Department of Labor.
Cxense, (2014). Publishing Profitability Survey Shows Mix of Optimism, Naiveté. [online] Available at: http://www.cxense.com/publishing-profitability-survey-shows-mix-optimism-naivete [Accessed 19 Dec. 2014].
Emarketer.com, (2014). Publishers Rely on Ads, Not Subscriptions, for Growth - eMarketer. [online] Available at: http://www.emarketer.com/Article/Publishers-Rely-on-Ads-Not-Subscriptions-Growth/1010868 [Accessed 19 Dec. 2014].
Fictionmatters.com, (2010). Who Are "The Big Six"? | Fiction Matters. [online] Available at: http://www.fictionmatters.com/2010/03/05/who-are-%E2%80%9Cthe-big-six%E2%80%9D/ [Accessed 19 Dec. 2014].
Fillmore, L. (2008). “Gray Publishing” Disappears as Barriers to Entry Fall | What’s New at Open Book Systems. [online] Pubnews.obs.com. Available at: http://pubnews.obs.com/2008/02/27/%E2%80%9Cgray-publishing%E2%80%9D-disappears-as-barriers-to-entry-fall/ [Accessed 19 Dec. 2014].
Flood, A. (2014). Self-publishing boom lifts sales by 79% in a year. [online] the Guardian. Available at: http://www.theguardian.com/books/2014/jun/13/self-publishing-boom-lifts-sales-18m-titles-300m [Accessed 19 Dec. 2014].
Greco, A. (2005). The book publishing industry. Mahwah, N.J.: Lawrence Erlbaum Associates.
Greco, A., Rodriguez, C. and Wharton, R. (2007). The culture and commerce of publishing in the 21st century. Stanford, Calif.: Stanford Business Books.
Greenfield, J. (2014). Why Amazon Is Going After Publisher Profit Margin. [online] Forbes. Available at: http://www.forbes.com/sites/jeremygreenfield/2014/06/16/why-amazon-is-going-after-publisher-profit-margin/ [Accessed 19 Dec. 2014].
Rusch, K. (2014). The Business Rusch: Understanding Publishing (Changing Times Part 2) | Kristine Kathryn Rusch. [online] Kriswrites.com. Available at: http://kriswrites.com/2010/10/28/the-business-rusch-understanding-publishing-changing-times-part-2/#sthash.vv7P3Rym.b2lv2Ps1.dpbs [Accessed 19 Dec. 2014].
The Economist, (2014). Big, bad Amazon. [online] Available at: http://www.economist.com/blogs/freeexchange/2014/10/market-power [Accessed 19 Dec. 2014].
van Kranenburg, H. (2004). STRATEGIC OPTIONS FOR THE NEWSPAPER PUBLISHING COMPANIES. PH.D. University of Maastricht.
Van Weezel, A. (2014). Organizational Changes in Newspaper Firms and their Relationship to Performance. Ph.D. Jönköping International Business School Media Management and Transformation Centre.
Wischenbart, R. (2014). Global Trends in Publishing 2014. Frankfurther Buchmesse Business Club.
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