Don't get too relaxed

There's been a couple of things that caught my eye lately because they have been interpreted as suggesting that things in the publishing industry aren't going to keep changing.

Traditional-publishing consultant Mike Shatzkin (via PV) did a little victory dance over the news that Amazon's publishing ventures are being affected by the Barnes & Noble boycott. I'm sure it was very soothing to his clients to hear things like:

Big publishers are reporting that ebook sales are now approaching 30% of their revenue, which is about a 50% increase from what they said last year. That follows several years when ebook uptake increased by 100% or more.

The problem with this is that, as Tom Simon pointed out, a slowdown in uptake is inevitable as the share of the market that goes to e-books increases.

Let us assume, strictly for convenience, that the total size of the trad-published book market is fixed. This past year, ebooks represented 30 percent of their sales. That was a 50-percent increase over the previous year: therefore, in that year ebooks represented 20 percent. If that in turn was a 100-percent increase over the year before, then in that year ebooks would have been 10 percent.

Exponential growth curves (especially when expressed as percentages of a larger market) cannot continue forever.

The growth in e-books will slow or maybe stop and even reverse itself one day, but that doesn't mean much. For example, if we pretend that the book market is fixed (which it isn't really), and if one day e-books represent 100% of the book market, then the share of the market represented by e-books will grow no more, because it can't. But that lack of growth is not going to help companies built around the sales of paper books. Likewise, if e-books make up 95% of the total book market, and one year that they drop to 94%, that's still not going to be especially helpful.

Another idea that is getting tossed around is the notion that, just because everyone and their dog is buying a tablet computer, that won't increase e-book sales--instead e-book sales wiil remain flat. Why? Because current data indicates that people who buy tablet computers read fewer books than people who buy e-reading devices.

Isn't that shocking? People who buy dedicated e-reading devices read more books than people who buy all-purpose tablet computers! Next thing you'll tell me is that people who buy juicers drink more juice than people who buy all-purpose food processors!

The relevant question is, do people who buy tablet computers buy more or fewer e-books (not books in general) now than they did before they bought the tablet computer? What is going to happen to that number over time as these all-purpose device owners realize (as I did with my smartphone after a few months of ownership, depite the fact that I love to read) that, hey, you can read books on this thing, and, wow, it's beyond easy to buy a book with it?

In other words, things are still changing, and they are largely changing in a way that will increase the e-book market. And the data we're forced to use to measure that change still blows.

It's also possible to overestimate how much things are going to change and to have false certainty in that direction.

For example, let's look at Barnes & Noble. Definitely a troubled company, no argument there. But even if Barnes & Noble's e-book business collapses entirely, does that mean that all Barnes & Noble stores are going to disappear, like Borders did?

I don't know, and neither does anyone else. Obviously it's a possibility--it happened to Borders, after all. But there are others.

Let's say that the e-book business collapses entirely and Barnes & Noble is reduced to a company with 1. a chain of paper bookstores, and 2. a ton of debt.

Believe it or not, there are people who would see value in that. To recap the optimist argument from last January:

While the bookstores are likely to go into gradual decline as e-books grow, they can probably generate at least $300 million in annual earnings before interest, taxes, depreciation and amortization. A conservative multiple of three times values the bookstore business at $900 million.

The thing is, that while the sexy large-scale growth businesses dominate Wall Street, there are many, many businesses out there that just plug along, generating a relatively-predictable amount of revenue a year. And there are many private investors who are happy to have a piece of a revenue-generator like that, even if it is (slowly) declining.

Barnes & Noble may go bankrupt (which can actually be helpful because it usually wipes out a company's debt); it may go private. And despite all that, it may remain what it is today: The nation's largest chain of bookstores.

Or it may vanish off the face of the Earth. Who knows?

It's hard to plan for uncertainty, but it's at least possible to not be caught flat footed by it. That's why I think it's important to preserve nimbleness--to stay away from long-term contracts, to not lock yourself into (or out of) any particular position. These days, it's all up in the air, and you have to able to respond.