The subtext of REDGroup's collapse

Twenty years ago, commentators were predicting the rise of the electronic book. The questions weren't what and how, but who and when. I'm willing to bet on the integration of digital rights, bookstores and online retail. But only the who and when are up for grabs. Who'll take the bet, and who'll decide its outcome? The REDGroup collapse may bring a healthier outcome one step closer.

As a former publisher at Allen & Unwin, I'm well aware of the popularity of book reading. Indeed, it is still the most popular single pastime we know. Because we impressionable humans love a good story, it will likely remain so.

But how we buy and read books will continue to change, and those with a stake in it might have to move that stake to safeguard it. There must be a much tighter alignment of interest between author, reader, publisher, bookstore and online outlet, with a new balance between time and money.

Publishing is neither printing nor distribution. It is neither paper nor e-ink. It is the creation and support of content, and the delivery of content in whatever ways are both appreciated by readers and profitable. At the moment, the industry is being buffeted by the simultaneous rise of e-books, online retailing and retail chain discounting, as well as changes to copyright policy. It must get its internal dynamics right to remain attractive against more and more home, computer and mobile entertainment.

It is worth noting that no company has ever made an investor-attractive return by publishing printed books in Australia. All the big names have used another business to subsidise their publishing. Some were printers, some were disguised real estate operations (Angus & Robertson). Most, even those with a strong local list, have been and remain distributors of overseas titles (Penguin, Random House, Allen & Unwin, etc). How they make money from that distribution matters. If they don't make enough, say good-bye to local publishing, and much else besides.

Further, book retail is not like other retail. With few exceptions, each 'product' sells in the low thousands nationally, with a shelf life of just a few months. Retailers get about a 50 per cent discount on the RRP, but almost all books are sale or return: that's right, if it doesn't sell, it goes back to the publisher. That's a big leg-up for retailers, but one that can be abused. If they order way over what's needed for impressive in-store promotions and don't back it up with sales, then the publisher takes the hit, and cuts back next time.

The publisher/distributor takes that risk and more. For local books, it pays the author, editors and designers. It then shells out for the printers, sales teams, author tours, publicity and point-of-sale marketing to support the book's potential. If all goes well, the author might get a royalty of 10 per cent or more, production costs might be 15 to 20 per cent, distribution costs five to 10 per cent, retail margins 45 to 55 per cent and the publisher's margin 10 to 15 per cent. These all vary tremendously with volume, except the retailer's sale-or-return margin.

To earn a margin for distributing overseas titles, as with local titles, the publisher employs an army of public relations and marketing people to arrange interviews, reviews, author tours, literary lunches and social media snippets – anything to get the book talked about. Because books only ever sell in quantity through word-of-mouth. And if you take away territorial copyright, anyone can import and sell that book. There's then no point in the publisher investing in that marketing and publicity, because there would be no return on it. That's one among many reasons for maintaining territorial protection, so long as its price to the consumer is not too great.

For the moment, e-Books and overseas online retailers have only just started to gnaw away at local distribution. Their convenience and price advantages make sense, so the trend will continue. But to fly books in small parcels around the world is surely crazy, not least for their carbon footprint. There must be a way for books to be bought online and sent from local warehouses, through the same distributor who has spent money to secure the local rights for the book, and invested more in its local marketing and publicity.

As with the music industry, the book industry needs a greater alignment between where the money is spent creating and distributing books, and where the income is drawn.

Well-managed bookstores can make money in good times. A strong backlist and good staff who know their books are essential to keep readers enthusiastic about buying books. But times aren't so good. Money for discretionary spend is tight. We see prices falling for almost everything except rent, food and power, and almost expect it. But bookstore prices have kept going up. So we borrow books, and when we do buy, we'll look for the cheaper price. Online is one option, e-books another option. We can buy them from our couch at home. Though bookshop browsing is a rare genteel pleasure, getting to the bookshop can be as difficult as finding the time to do it. The bookstore share of the publishing pie, low-risk as it is, is shrinking. It certainly won't pay off too much debt.

Brick and mortar bookshops will only survive if they form part of a vertically integrated enterprise that includes the distributor, and an online and e-book retailer. Bookshops need close and effective relationships with their publisher/distributors. They need to work together to make a larger pie, rather than squabble over their share of the current one.

To imagine how this might work, consider how we buy wine. To keep a supply at home (or dream about it), I'll buy wine by the case or on rare moments, more. I can get it cheaper that way, with free delivery. More to the point, it doesn't matter when I drink it, and it may not be for quite some time. If I need a bottle now, for a dinner or gift, then I'll waddle off to the grog shop and pay the penalty for convenience.

People will always want to buy printed books for today. They'll want to read them or gift them immediately. The problem is, those immediate-use sales are a decreasing share of the market. If there are to be bookstores to serve that market, they'll need other ways of making money. The good thing is that both we readers and the publishers want there to be bricks and mortar bookstores, because most of us still like to see and feel before we buy.

The money will have to come from electronic orders or electronic delivery, or both. You can browse a bookstore and, as well as buying a book on the spot, put in an order through a store device or your smart phone app for home delivery or store collect, or just download the electronic copy. Not the crazy in-store orders that happen today: "Oh yes, we should be getting that in again in a fortnight, please come back then.” But a firm payment and commitment, just like online, only more local and immediate.

For this to happen, though, the same enterprise must have a stake in the bookstore, the online store, and the distribution. The distributor won't care how the buyer buys, because they will benefit either way. If the distributor sells to the bookstore at 50 per cent of the RRP, then there's no disincentive to sell to the online buyer at 50 per cent plus postage. If the buyer gets more than a few books at a time, that postage will be negligible. Although sales through the bookstore will be cannibalised, who would care? Sales overall will increase with lower pricing, and almost all sales will flow through local distributors, rather than through the US or UK.

The bookstore would basically have 'display copies' of as many titles as possible, and carry one or two more of certain titles for immediate sales. Daily resupply, as the better bookstores practice today, would keep that stock fluid. It would be a place where people would be happy to spend whatever time they had. People who like selling books are not hard to find, and they'll be all the happier to know that their enthusiasm isn't leading to lost online sales.

At some point, a financial controller or management consultant might observe the obvious: that the bookstores don't make enough money of themselves, and conclude that therefore they should be scrapped. But their owners would recognise the bookstore's indispensable role in a healthier system. And, as everyone in the book trade likes to think, correctly, that they're selling something more complex than soap, the system itself needs these internal subsidies for the whole to remain healthy.

The REDGroup collapse is a signal event in our publishing history. It should provide the impetus for the industry to secure a sustainable response to the forces which continue to assault it.

Josh Dowse is a consultant on sustainable business.