Book Publishing In 2010 Case Solution

ii. Threat of Substitutes

Threat of alternate service is considerably high because the industry is effectively competing with every avenue, which is consuming an individual’s time such as, television, print media, social media, etc. Exhibit 6 of the case study makes it apparent that the reading time is considerably low among teenagers and young adults; however, it increases with the age. This shows that new entertainment avenues such as social media, which is only a decade old, is consuming a lot of time.

iii. Bargaining Power of Suppliers

Cost of paper (30%) and royalties & advances to authors (15% of list price) are biggest expenses for any publishing house (Exhibit 11, Case Study). Due to the high volume of books, the major publishing houses have reasonably moderate bargaining power but for smaller houses, it is considerably low. 

iv. Bargaining Power of Customers

Publishers deal with wholesalers and retailers – both brick-and-mortar and online to sell their books. Publishing houses have to rely heavily on their business partners because the success of their books depends heavily on the support – pricing, placement and exposure of books for the public so the bargaining power is moderate.    

v. Industry Rivalry

The top five fashion houses occupy the majority of the market share in the publishing industry. Apart from the few instances here and there, the top five houses rarely involve in a price war but they have their individual fortes and strategies to attract customers and authors. So, the rivalry is considerably high and the volatility in the external environment makes it more competitive.

2. Using Porter’s five-force model analyze how the advent of e-books has changed the industry structure and competitive dynamics.

Porter’s Five Forces – Post advent of e-book Revolution

i. Threat of New Entrants

Threat of a new entrant is low because the publishing industry is a capital-intensive industry. As mentioned in Exhibit 5 of the case study, new publishers won’t have the option of backlist for profitability, which derives the four-fifth of the entire net income so, for the first few years, they must rely on front-list only. Differentiation factor is limited so new publishers may target a niche market; however, the smaller the market size, the greater the risk of failure. Moreover, the publishing industry is struggling at the moment to maintain the same level of profitability because of e-books, which is not as profitable as hardcovers or paperbacks (NPR, 2012). 

ii. Threat of Substitutes

Threat of a new substitute is considerably high. The industry is constantly competing with other avenues of entertainment such as social media, television, print media, online content – YouTube, Netflix, etc. Time dedicated towards reading is decreasing, which is apparent from the reduced sales of the top five companies. 

iii. Bargaining Power of Suppliers

Bargaining power of suppliers, which include paper producers and the authors is moderate to high. Due to the global economic recession of 2008-12, almost every industry has faced a reduction in budget, which is why the negotiations between suppliers particularly authors have become more aggressive. Authors felt that they are getting an unfair share in royalties of e-books as the cost price is lower – it can be seen from the Author Royalty Scenario Exhibit 12 of case study, which is why agents have been pushing publishing companies. Moreover, the business model is also changing gradually as some companies are trying to remove the intermediary – agent (Hu & Smith, 2013).  

iv. Bargaining Power of Customers

Bargaining Power of customers has increased considerably since the advent of e-books. New players such as Amazon, Apple, etc. have jumped into the market and are affecting not only the business model but also, the profitability of companies. Due to the huge financial muscle of retailers such as Walmart and Target, they are playing a role of loss leaders for the hardcovers and paperbacks whereas, Amazon has priced almost 80 percent of the e-books at a price of $9.99, which is now considered to be a de-facto price. Though publishing houses are negotiating their position with retailers but it has become difficult for them to sustain the same level of profitability (Reid, 2014).

v. Industry Rivalry

The industry rivalry is high as independent and free online publishers of content have jumped in and are directly competing with the major houses. Though their business model does not seem to be sustainable in the long term, but they have affected the current performance of the industry.

3. What are the long-term threats and opportunities facing the book publishing industry?

Threats and Opportunities in the Book Publishing Industry

i. Threats

The advent of e-books and e-readers has reduced the demand of hardcovers and paperbacks, which had a higher price point so were relatively more profitable per unit (Bury, 2013). Lower price point of e-books – typically at US$ 9.99 because of the stronghold of Amazon has affected the profitability of the industry (Reid, 2014). The competition has moved down the value chain i.e. the focus is on the e-readers – companies that are producing it and the price point at which they are selling with the varying number of features as apparent from exhibit 7 of the case study. This means that the retailers such as Walmart, Target, Amazon, Barnes & Noble have greater negotiating power as compared to the publishing houses (Maxim & Maxim, 2012).