Blockbusters and Publishing: The Pareto Principle vs. Netflix

In an article in today's Wall Street Journal by Anita Elberse, Blockbuster or Bust - Why struggling publishers will keep placing outrageous bids on new books, Ms. Elberse describes how publishers continue to fall back on their old business model of paying large advances for blockbusters, even in these difficult economic times.

It brought to mind the cliché about generals that are always preparing to fight the last war. That is exactly what the publishing industry seems to be doing now.

Betting on a small number of books to have huge sales makes perfect sense if you have limited channels of distribution, high overhead and production costs. That has been the rule in publishing for decades but is obviously changing, even if the publishing giants haven't figured it out yet.

I suspect that in the next decade or so we will begin to see the Pareto principle replaced by what I call the Netflix principle. The Pareto principle, as applied to publishing, suggests that 20% of the titles will generate 80% of the revenue. Therefore, go after the blockbusters. Pay large advances in hopes of hitting that one big best-seller. End of story.

The Netflix principle suggests a different approach. It suggests that consumers really like variety. Presented with choices, they will not necessarily make the same stale selection, over and over again. Unlike a typical DVD rental shop which can display perhaps a few hundred titles, Netflix offers 60,000 different DVDs for rent. From the New York Times - What Netflix Could Teach Hollywood

Out of the 60,000 titles in Netflix's inventory, I ask, how many do you think are rented at least once on a typical day?

The most common answers have been around 1,000, which sounds reasonable enough. Americans tend to flock to the same small group of movies, just as they flock to the same candy bars and cars, right?

Well, the actual answer is 35,000 to 40,000. That's right: every day, almost two of every three movies ever put onto DVD are rented by a Netflix customer. "Americans' tastes are really broad," says Reed Hastings, Netflix's chief executive. So, while the studios spend their energy promoting bland blockbusters aimed at everyone, Netflix has been catering to what people really want -- and helping to keep Hollywood profitable in the process.

I suspect that a similar thing will begin to happen in publishing. The walls, both literally and figuratively, are coming down. I find I buy far more books from Amazon than anyone else simply because they have the books that I will never find in bookstores full of best-sellers from the book factories of James Patterson, Clive Cussler and the rest.

Rather than continuing to be narrow and blockbuster focused, publishing in the not too distant future will have to broaden its scope. The average Barnes and Noble "superstore" stocks over 100,000 titles. Right now, Amazon offers 215,000 books on their Kindle, all available at literally a touch of a button. Once the ebook format wars end and the publishers stop being stupid in their pricing of ebooks, the potential is huge.

For those who prefer ink and paper the Espresso Book machine, as well as other print on demand technologies and services should make more titles available to everyone at lower costs. OnDemandBooks, the manufacturer of Espresso claims, "What Gutenberg's press did for Europe in the 15th century, digitization and the Espresso Book Machine will do for the world tomorrow." Whether or not one believes the hype, technology should continue to make access to books easier and cheaper, which ultimately has to be good for both readers and writers.

We are not there yet. Today's blockbuster strategies by the major publishers would make more sense if the calendar said 1970 rather than 2009. Perhaps it is time that they caught up with the rest of us.

Comments

[John14]

Read Elberse's article in the WSJ with great interest. Her story matches with what I am seeing in the industry as a publishing exec. Think she is spot on with her conclusions.

[NYCPub]

Now, Elberse's piece has more holes than swiss cheese as well. Nowhere does she differentiate between a good exorbitant advance and a bad one. Does anyone really believe that Tina Fey, who's an awesome talent and the flavor of the year (last year) will make back her $5mill advance when her book of whatever it is (no one yet knows) is published (whenever it is-- no one knows yet)? Umm, not if they're intellectually honest. So that's a dumb acquisition. But would anyone argue that getting Christopher Hitchens for a few hundred $K for his book God Is Not Great was a bad blockbuster acquisition? Doubtful. It's made 20 times its advance. In addition, Elberse argues that top agents wont go to publishers who don't pay ridiculous sums for books. That's ridiculous-- and stupid. Does she mean to imply that every other pubisher involved in the bidding war for Tina Fey's book, you know, all those other megapublishers that didnt end up paying $5Mill, won't have their doorsteps darkened by the uber-agents anymore. Hardly. I could go on with her article, but it's clear she should stick to whatever her day job is because she doesn't know what she's talking about.

Bidding for blockbusters is the only way to continue to pay for the huge overhead all the publishers have. Smaller publishers continue to publish the majority of books in this country, and they hit the lottery occassionally. Nothing will change.

[NYCPub]

There are many problems with this analysis.

Firstly, publishers are not Netflix. In this scenario the publishers would be Paramount Pictures. Does Paramount have 60,000 titles at netflix? No. Paramount has 500. If it rents 300 CD's per day, it loses money on all the films it has produced. It has no choice but to pay George Clooney or Julia their $20M a picture to try for the blockbuster. That success will pay for the 15 other smaller movies that are bigger crapshoots.

In addition, Netflix is the single market leader in this space. Just like amazon is. There is no single market leader in publishing. In fact, and here your argument goes even further afield: No one goes into a bookstore for the latest Simon & Schuster book. So where Netflix is a known brand that can move high volume, and therefore carry a billion titles, publishers have no such brand recognition and every book they publish stands on its own and has to compete with the 450,000 other books published EVERY YEAR. And you're the first person I've ever heard argue that MORE books are needed in the crowded marketplace. Most people say there is too much crap published.

[RickSp]

Of course publishers are not Netflix, nor did I suggest that they were. I also said that bidding for blockblusters makes sense if you have high overhead and production costs and limited channels of distribution.

The point I was making is that changes in both the market and the technology are increasing channels of distribution and and bringing down overhead and production costs. Soon the old models won't make sense. The markets are changing and not surprsingly, the publishers are still operating the old market models.

[BlackJAC]

Plot Hole: blockbusters tend to set the companies' bottom lines for the year, allowing them to take risks on other stuff that isn't expected to be as huge. Case in point: George Clooney was allowed to do GOOD NIGHT AND GOOD LUCK in exchange for doing the various OCEAN'S ELEVEN sequels.

[RickSp]

I was addressing publishing and not movie production. Nevertheless GOOD NIGHT AND GOOD LUCK had a production budget of about $7 million and had a theatrical gross of around $55 million plus $20 million in DVD sales. Not a bad return on investment.

[BlackJAC]

The principle also applies to book publishing: with such a huge take on stuff like THE DA VINCI CODE and whatever Oprah blesses, the publishers can be a bit more benificent in giving someone with their cheesy Tom Clancy knockoff action-adventure series lead-in paperback a deal.

[kenstremsky]

Thanks for writing about movies.

I have worked 9 years for a video rental store.

I have several movie recommendations on my website. You may like some of them.

My website is http://www.myspace.com/kennethstremsky

I added to my profile because of feedback.

Sincerely,

Ken Stremsky

[missnina]

i am an avid reader and lover of movies...i buy ALL my books from amazon and have a Netflix subscription. i realize some complaints are valid, however i think both are worth it. i may get amazon spam, but it can be deleted easier than dealing with going to a bookstore, wasting alot of time trying to find one book, then waiting in line to overpay for said book. although some complain they have to wait a long time for their movies, however, i never have. this is mostly because i watch documentaries, hollywood classics and foreign films...they have a jinormous selection, as opposed to video stores, which can fit all of these categories on one shelf. also, when i see a movie from netflix i really enjoy, i buy on amazon.

[Dukedraven]

While Netfix is the future, it's not without its problems. You have to wait longer and longer to get a movie that's in demand. And the website is set up so you can't complain to anybody.

[Spud777]

That was the reason I dropped my NETFLIX account a few years back. I was told they prioritize new release shipping based on the length of time you had subscribed. I did not consider "waiting to be a long term customer" worth the continued subscription.

[DavidMG]

There are also a lot of small publishers who can help accomplish the same thing. I am one of these. Although I believe in local buisnesses, amazon is a big help to us as we have no sales force. Such irony.
David Goldbeck
CERES PRESS

[badscience]

If you're interested in the "Netflix principle" you should read "The Long Tail: Why the Future of Business is Selling Less of More" by Chris Anderson, who is credited with surfacing this principle. It is a brilliant analysis of how digital distribution is changing the "blockbuster" culture and business models of traditional ("old") media. I consider it a "must read" if you are in and/or interested in media and the business of entertainment.

An aside, I find it ironic that larry278 finds Netflix and Amazon so annoying. Both companies are dedicated to providing breadth of product far greater than brick & mortar businesses can economically deliver, as well as, recommendation engines to help guide customers to less well known books and films. I'm constantly impressed by Netflix' suggestions and I've watched literally thousands of movies.Moreover, Amazon is also one of the top print-on-demand companies for books, CDs and DVDs. I guess you can't please all the people all of the time!

[RickSp]

Chris Anderson's book does sound fascinating. I have read about. Probably past time I read the book itself.

Amazon and Netflix have their quirks. I find the Amazon "spam" less annoying because it is usually pretty well targeted based on books that I have ordered from them.

[larry278]

The netflix anology for publishing is useful but limited. When you rent from NetFlix you get spam constantly, "People who rented xxx, also liked yyy.", before you get to check out & pay for your choice. That adds from 3-10 minutes to a transaction. To understate the obvious, it's annoying. I switched to BlockBuster & other sources. Just in case NetFlix remains on my blocked senders list. The shot gun spam-like, "People who rented..., also liked,,,", is used by Amazon too. You guesed it, I've found other sources to replace Amazon. The computer generated suggestions suck. You get flooded with 'suggestions' for assorted ort & utter dreck.
University Microfilms used to do a publish on demand reprint operation for op titles. It was pricy & the reproductions you got were lousy [that was 30 years ago]. If its op, I go to a specialist & get a 2d hand copy cheaper than the UM custom reprint & it's readable too.
A publish on demand service which uses data stored in a computer, beats the hell out of a photocopy of the original. Probably it's cheaper to produce & will cost me less. Such services probably exist now. if I want an op title, I'll find one & buy them. The local book store could be a link in a similar op & low volume publishing. A local store would filter out an on-demand publishers spam too. To hell with NetFlix & Amazon. Death to spammers.

[TomFox]

I used to love BDaltons and WaldenBooks, then Books-a-Million, Barnes and Noble and Borders. But honestly, Amazon wins hands down these days. In fact, this Christmas I received a Barnes and Noble gift card that I promptly used but I found myself wanting to get out of the store as quickly as possible, even with the possibility of drinking an expensive cup of coffee.

My wife and I spend our weekends at home far away from the crowds and chaos. We enjoy sitting relaxing, reading actual books and watching our Netflix movies.

Personally, I prefer owning books and am not likely to get on the ebook bandwagon, but we may buy a Kindle as a curiosity more than anything. We love gadgets.

The future is going to be interesting.

[RickSp]

I enjoy owning books but at times worry that I will be crushed by a falling bookcase. Increasingly I have more books than living space.

A friend of mine has a Kindle, which he loves. He says that the ability to buy a book, (for $9.99 - less than he would pay for the hardcover and most trade paperbacks) and have it in minutes rather than days has spoiled him.

[TomFox]

You've made me think Rick. The Kindle could be a good thing. Especially when the books I'm taking on a trip weigh more than the clothes I'm bringing.

Perhaps more investigation is in order....plus less trees to sacrifice, always a good thing.

I don't usually get the book case falling...typically a single shelf that I've managed to upset, all with heavy textbooks.

[cylindar]

The publishing industry has been down the tubes for decades. The game is in distribution. Print on demand is a good idea but I do not believe it will be all that successful as people will get use to storing their books on their ebook readers and computers. It is a nice adjunct but ebooks are the future.

[Isis N]

I'd disagree, as even some youngsters like me enjoy the feel of a book in their hands, and the smell of the pages and ink. I don't think I'll ever go completely digital. It's not right.

[gsc 99]

Good analysis. NetFlix business model of many-to-many does provide better choice to customers

[pdxsteve]

Interesting Analysis. I also can envision the rebirth of the local bookstore, where local authors will have their own venue where they can sell their work.

[RickSp]

Northshire Books in Vermont has leased an Espresso Book Machine reportedly because they see a market in local and regional books which have gone out of print, as well as being able to publish public domain classics on demand. They will also publish books for local authors.

http://www.northshire.com/printondemand.php