Monday Note

Over the last month, I’ve been stuffing my iPad with books purchased online, long PDF files and other documents for later reading sessions. I’m waiting for the mind-blowing media applications, they’re still in the making. Several prototypes of French newspapers I have seen are quite promising. We have to be patient. This is just the start of the runway.

Compared to my computer, I realize I’m using the device in a different way. No mail (too clumsy), no writing, no twittering. Just reading stuff, the longer the better.

And I wonder: Can tablet computing be the missing link, the one that could rehabilitate (or rather introduce) long form reading in digital format — in a profitable way?

Let’s project ourselves two years from now. And let’s put the iPad aside for a while. It’s 2012. Tablets have become a cell-phone-like commodity, competition is strong. Aside of Apple, devices from Samsung or HTC running Android or god knows what operating systems are thriving. Standards for digital formats have emerged and e-books are heading toward a 25% market share in Europe and the United States. The digital publishing chain is running smoothly and efficiently with the following characteristics.

• The old production and distribution system that was eating 65% to 70% of the retail price is now down to a 30% fee taken by publishing platforms. They get this 30% for putting the publications on their virtual shelves and for collecting the money.
• These inventories are served by clever search and recommendation engines (not the Trabant-like system of the iTunes/iBooks store).
• To reflect decreasing distribution costs when compared to physical books, e-books retail prices are down by at least 30%.
• Authors also take advantage of the technological shift, they get higher royalties.
• New formats have emerged; the old dichotomy between hardcover, priced at $25, and paper back, at $10, is gone, replaced a by a more diversified pricing structure.

Hence the question: What will the impact be on journalism and on the bottom line of media companies?

Before attempting an answer, let’s reframe this in the dual context of the current business situation and of the newscycle. Managing a newsroom within today’s constraints is a difficult exercise. In daily newspapers, physical editorial space (i.e. column inches) is scarce, making long pieces a hard-sell to the editor-in-chief. The web is more welcoming, although we all know that beyond a 600 words story, reader attention tends to fade — especially for younger audiences.

As for the newscycle, it accelerates and becomes increasingly complex, requiring more expertise and, in theory, more editorial resources — should editors decide to go below the surface. Take the debt crisis in Europe, for instance. The general framework is pretty simple: thirty years-old traders in shark-frenzy mode, going against sixty years-old politicians. The sharks prey on the politicians who have failed to build decent economic leadership since the introduction of the euro system (coins and banknotes entered in circulation January 1st 2002).

Now, getting to the bottom of it is much, much more complex. Explaining how a small country (Greece), that accounts for less than 2% of U.E. GDP, is able to threaten a $16 trillion economy will require more that  a couple of quick stories. The same goes for dissecting the financial instruments used by hedge funds to take advantage of the political confusion; it can’t be summarized with a nice interactive graphic (plus, thanks to Steve Jobs’ raid, the Flash language of the graphic would soon be as readable as an ancient papyrus). By any measure, complexity requires depth.

Like in a book.

A book?

Oddly, I’ve been myself through the related experience. Last winter, I came up with a book project that had the attributes of decent journalistic work: an angle, a narrative, sound fact-based demonstrations, etc. (Unsurprisingly, it had something to do with the themes I’m addressing in the Monday Note). Everything sounded OK, I had an editor (in the Anglo-Saxon sense, i.e. the person who takes 2% of the retail price to help with the delivery of a book through the likes of Marines boot camp techniques). For good and bad motives (a series of overseas trips, a complicated work schedule and an all too human propensity to procrastinate), I put the issue to rest for of a couple of months. When I went back to the manuscript, roughly a third of the 5000 words synopsis was already out of date, with many facts no longer relevant, aging data and so on. The book could be finished by, say, next October, with an early 2011 publication schedule. I had to face it: factually speaking, this work would have been a piteous piece of out-of-date journalism.

The concept of book publishing needs an upgrade. It has to be reconsidered in order to take advantage of the digital medium. (Not all sorts of books of course, I’m mostly talking about non-fiction, news-related items here).

Let’s try back-of-the-envelope calculations to assess the P&L and, then, go back to the coverage of the euro crisis. A good business reporter is willing to explain in greater detail why the current relief plan is doomed in the long run. First, let’s forget about the 300 pages of a hardcover-equivalent opus; a swift and agile 120-150 pages piece will do just fine.

Now let’s compare paper and digital cost structures, with the following (and debatable) settings:

• The target retail price is set at €9.99  for paper and €5.99 for the digital version (you can count in dollars since the two currencies are now on a dangerously converging path…)
• The line “other editorial costs”  includes: editorial creation, steering the lazy and a neurotic author, copy editing, proofing, some design and, for the digital part, making a weapons-grade PDF file with DRM, anti-piracy features such as watermarking, etc.
• For the physical product, printing and distribution (wholesale and retail) are based on standard French practices.
• VAT has been set arbitrary at 8%; in France it is 5.5% for print, but 19.6% for the same book in file format (believe it or not: Finance ministry bureaucrats decided to follow a U.E. regulation that assimilates a downloadable e-book to a computer service, hence the higher rate); in Spain it is 4%. So, let’s stick to 8%.

It goes like this:

You’ll notice the following: even with a 40% lower digital retail price, the author makes 33% more and the publisher’s margin is multiplied by eight. (Needless to say, you can reflow the numbers to address the author’s legitimate whining).

Now, let’s consider a large national daily selling 400,000 copies per day and assume that 2% of its buyers will purchase this riveting narration of the euro crisis; that translates into 8000 sales. Since the newspaper is already paying the writers and the editor, we’ll cap these two cost items at €10,000 for the month of work required by the project. Altogether, the e-book will make €44,000 before tax. This translates into a €20,800 margin for the newspaper acting as the publisher, a 47% gross profit margin — not bad in the news business!  And the risk is minimal: taking into account the €10,000 of pure editorial costs (writer + editor, which are due no mater what), the break-even point is around 2500 e-books, an easily achievable sales volume considering the promotional firepower wielded by a good newspaper. In addition, you get a fairly up-to-date journalistic product, one that can be versioned to reflect the subject’s fluidity.

You get my point: e-books as ancillary products for a newsmedia are something worth considering. Not now, but within a couple of years as the worldwide installed base of reading devices reaches tens of millions. At this point, at any media company version 2.0, e-books will be part of the standard toolkit.

—frederic.filloux@mondaynote.com

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