Something Mike Shatzkin told me once has really stuck with me: “The people at the major publishing houses aren’t idiots.” In fact, I’m pretty sure Mike has told me this more than once, usually after I pointed out something that I think publishers should try and can’t figure out why they don’t. Mike could see that the assumption in my advice was that publishing executives didn’t know what they were doing.
It turns out Mike was right and I was wrong. Publishing executives aren’t idiots.
Neither were executives at practically every company that has been disintermediated or made obsolete by innovation. This is a common theme in business lore and among the general public, and it is dead wrong. Established companies don’t go under because they don’t understand their market, their customers, their product. Nor do they go under due to managerial blunders, lack of R&D, and all the other myriad reasons commonly proffered. In fact, companies lose market share and go under precisely because they are well-managed.
To understand how this works, you simply must read The Innovator’s Dilemma by Clayton M. Christensen. I’m not kidding. This book will blow your mind; you will never look at business transitions the same way ever again. If you have any interest in publishing (or how the world works in general), move this book to the top of your reading pile.
I can’t do the entire thesis justice, but I’ll entice you with a few of the lessons here. I’ll also say that this is one of the very few business books I’ve read that uses copious amounts of real-world examples. This isn’t guessing. This is hard-core theory in the best and most scientific use of that word. Christensen is even so bold as to make predictions in the form of case studies that are eerily prescient. I repeat: This book will blow your mind.
So how do companies go out of business if they are well-managed and if they can clearly see the disruptive technology heading their way? It helps to understand that most companies that are disrupted are the earliest to be aware of the disrupting technology and to even dabble in it or patent the new tech first. Like Kodak’s work with CCD sensors (which led to digital cameras). Or publishers experimenting with digital books decades ago. The problems these companies face are several, but the biggest are these:
1) The disruptive technology is usually lower-margin while in its infancy, and so a “win” is not big enough to motivate managers and employees.
2) Existing customers and sales networks are not interested in the disrupting technology. They want improvements and a continuation of current products. Greater profits are to be made satisfying these demands rather than appealing to new markets (and again, getting employee buy-in is difficult, so the pressure not to pivot comes from without and within).
3) The initial market for the disrupting technology is never precisely what the innovator thinks it will be.
A great example offered in the book is Honda’s entry into the market with the dirt bike. Honda’s attempt to sell a low-cost motorcycle to US customers was a failure from day one. Established dealers weren’t interested in the low-margin offering. Customers didn’t want smaller bikes for transportation. It wasn’t until Honda staff started using the SuperCub model off-road to let off steam that a different market was envisioned. The bike was retooled for off-road use and sold through sporting good stores. When Harley tried to emulate the product, their existing customers and sales forces balked. Once they gained entry, Honda began investing in “sustaining innovations,” which are refinements within the current market, and were able to take share from what existing players, like Harley, do best by moving up to road and touring models.
The computer industry is full of these examples, and Christensen uses the hard drive manufacturing industry for many examples. He also uses the mechanical excavator industry. By looking at which companies failed and which succeeded, he is able to test his theories, and you’ll be amazed at how well they hold up. If you are interested in the publishing industry at all, you’ll see evidence of his theories everywhere you look (same for music, TV, social media, etc.). I’m telling you: read the book.
In the end, you’ll see that Christensen offers some very actionable advice by looking at hundreds of real-world successes and failures. The key to creating a culture that rewards small wins and lower profit margins, while having the support of a larger company, is to spin off divisions that are allowed to operate independently while possessing the potential to disrupt the larger business as a whole. When companies set up the disruptive technology in-house, they almost always fail. When the disruptive technology is set up as a separate entity, they often succeed brilliantly.
I’ve always admired Apple’s ability to make its entire product lines obsolete. Why wait for someone else to do it? It requires uncommon vision to manage this from within, usually a very powerful and far-seeing individual or with a culture that inspires disruption. Steve Jobs was one of the former. Google’s culture of experimentation on company time is an example of the latter.
Consider for a moment that it was Amazon who practically made the ebook successful. Their business was in shipping things, initially books. Why would they dabble in ebooks and ereaders? I can easily see an IBM-like or Kodak-like moment where Google or Apple invent the ebook marketplace and Amazon becomes the hero to book-lovers and the last bastion of hope for the print industry (much as B&N went from villain to hero). Instead, Amazon disrupted its own primary business. They are trying to do so again with subscription models, fan fiction, crowdsourced writing platforms and discovery tools, and much else. These divisions are set up to be largely autonomous, where small wins are big deals for the divisions, even as AWS and other projects make outsized profits. The cycle of experimentation and a willingness to fail are an asset. Possibly the company’s greatest asset.
Another fascinating point in this MUST-READ book is that established companies often make their greatest profits right before they go under. How can this be? The maturation of sustaining innovations and efficiencies reach their peak just as disrupting innovations mature into the same marketplace. Think of the innovating technology as a line creeping upward but lagging behind the existing, sustaining technology:
That upward trajectory of both lines represents a mix of benefits, price, convenience, reliability, and so on. At first, the disrupting technology does not have a high enough mix of these features to appeal to existing customers. It’s left to early-adopters, who can stomach the higher price, lower quality, inconvenience, unreliability, etc. But at some point, the existing technology improves well past what customers demand. That is, the storage capacity is more than needed. Or the quality is much higher than what is required. At the point at which the disrupting technology, which was formerly only suitable for a smaller customer base with different needs, enters the mainstream marketplace, it’s already too late for established companies to pivot.
What gets in their way most of all? The existing cost of doing business. Bloat. The need for those higher profit margins. The disrupting companies are small and nimble, and they can thrive at 30% margins where the established company needed 50% margins. Overhead gets in the way, as does the existing culture within the company, which looks for wins of a certain size and has customer contacts and needs that have progressed to the top of what the market demands, while all the meat at the bottom of those demand tolerances are being gobbled up. Music purists will say that digital song files are inferior to analog, but customers said it was plenty good enough. Storage, convenience, immediacy, selection, and price trumped other factors like quality, physicality, curated local stores, etc.
In a blog post last year, I posited what I would do if I had to run a major publishing house. One of the suggestions I made, and one I’ve harped on over and over since, is the need for a major publisher to close shop in NYC and move to more affordable real estate. Reading Christensen’s book, I’m convinced that this is the only way one of the Big 5 can thrive in the publishing world ten or fifteen years hence. The hardest part of dealing with disruptive innovations is restructuring to subsist on different margins. Most companies make the mistake of trying to achieve this through layoffs, mergers, and a gradual reduction in size. Layoffs pare payroll. Mergers like that between Penguin and Random House increase efficiency by jettisoning redundancies between the merged entity. Reductions in size are had by closing imprints (or in the case of retail, like Borders and B&N, shuttering store locations). The first and last of these create a spiral toward irrelevancy or bankruptcy. Mergers simply delay the need for one of the other two options (mergers are really a combination of the other two options, as they often lead to an overall loss in positions).
So why is moving out of NYC the answer for one of the publishers? Cutting costs would allow for competition both with suppliers (authors and agents) and customers (readers). Without offices in midtown Manhattan and along the Thames in London, a rogue publisher would be able to pay higher royalties, thereby out-competing for the juiciest manuscripts, while also offering lower prices, thereby out-competing for market share. In fact, this is precisely what Amazon has been able to do. They pay their imprint authors 35% of gross, which is double what the New York publishers pay. Or they pay their self-published suppliers 70% of gross, which is nearly six times what New York publishers pay. At the same time, they offer their products for a lower price, taking crucial market share.
This is the pattern for the dozens of examples offered in Clayton Christensen’s marvelous book. You can see how it played out in other forms of entertainment, and how it is playing out right now in the publishing industry. You can also see in his work how difficult it is for companies to pivot to new marketplaces and customer bases without upsetting existing relationships, both outside the company and within. Getting editorial to move toward erotica or new adult and away from literary requires an entire cultural shift, which isn’t easy (or even advisable in many cases). Greater success can be had by spinning off a new division, setting them up elsewhere so that small wins feel like big victories, and let them gradually eat at your own market share. It’s the courage to create the iPhone, which will kill iPod sales. Or the iPad, which will hurt laptop sales. Powerful CEOs with singular vision can do this with great effort. Spin-offs and skunkworks can do it far easier and have done so successfully far more often.
Having finished the book a few days ago and considering the implications for Christensen’s theories, I’m willing to make some predictions. Predicting the future, of course, is idiocy. It’s not possible. But the power of theory comes from its ability to offer prediction and reproducibility, not its strength in describing what has already happened. So my predictions are these, with the idea of revisiting this on my deathbed to see if I learned anything:
1) Low-cost reading entertainment will trump high-cost, even if the former comes in a less-adored package and with lower fidelity. That is, even if most readers “prefer” paper books and even if the low-cost items contain more mistakes or typos.
2) Print manufacturing and sales distribution will be destroyed by digital. This might seem obvious to some, but many industry experts are claiming that ebook growth has leveled off. I think ebooks will become 95% of fiction sales and 75% of non-fiction within fifteen years.
3) The first company to go all-in with mass market paperbacks will control most of future print market share. Grabbing 90% of what will eventually be print’s roughly 20% of the market might not sound like much, which is why no one is going after it now. But the low-margin option that customers want but that established industry leaders see no profit in is the basic definition of a disruptive technology. The first print-on-demand machine that can handle the thin paper and trim sizes needed for mass market POD will make a lot of money.
4) Physical bookstores will become much smaller and more specialized, or will simply move inside other retail spaces.
5) Most damning for my profession: Reading options will decouple from what we think of as “books,” as most reading will be done communally or on streaming websites or serially. I give this one another fifteen years before it’s obvious. Say 2030. What we think of as a “book” will be the vast minority of what’s read. Works will become shorter in individual package but longer in overall scope. Think seasons of TV.
6) Because of (5), authors will make far less per “read” in the future, as there will always be more people creating than buying (and this will only become more true as time goes on). The same forces that are allowing self-publishing to disrupt major publishers will eventually allow hobbyist writers to take vast market share from self-published authors. Tools that automate copyediting will improve until this is done for free and with the click of a button rather than hiring out editors. IBM’s Watson technology makes this practically feasible today. Also, the packaging will become automated, both with perfect digital file formatting and auto-generated cover art. Again, both will be free and as easy as clicking a button. This will greatly expand the pool of potential authors, forcing out many who are disruptive forces today simply because they are able to tackle these obstacles themselves or are willing to hire others to do so.
7) In fifty to one hundred years, authors themselves will be obsolete. No one will believe this today, but it’ll probably happen sooner than I’m giving it credit for. Already, computers are writing columns for the sports pages, and readers don’t know that’s what they are reading. At some point in the future, books will be written in a few seconds, tailored to each reader based on what they enjoyed in the past and what people with similar tastes enjoyed. E-readers will measure biometrics during the reading process to refine future works. Books will be infinitely diverse, but there will be a cultural clash over whether or not the empathy-building advantage of fiction is lost in a world of such catered entertainment. Human writers will be esoteric and admired by those who consider themselves to have the highest tastes. But it won’t change consumption habits; readers will gobble up stories written just for them. And if the pulse fails to race, a beloved character just might meet their end. We human authors won’t have to guess who to kill and when. It’ll happen when you very least expect it.
Don’t let the wackiness of these last predictions dissuade you from diving into The Innovator’s Dilemma. It’s a fantastic work. I’ve never put this much time into a blog post about a book recommendation. I’m telling you, this is a work that will explain so much of what’s going on around us. You’ll love it.
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