KENNETH KALES

...most of it relates to common

sense and something many of you
will remember about our industry
from a time gone by; and that is the
art of being ladies and gentlemen in
an often brutish world.

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CONSEQUENCES FOR OUR ACTIONS October 16, 2009

Every year except this one. Perhaps that's it. Because this week I would
normally be in Frankfurt as I have been for the seven previous years. I
have gone so many times that I feel out of sync here in my office instead
of traipsing from 3.1 to 6.0., or immersing myself in the fascinating books
and publishers from New Guinea and Iran and Somali; or like a bee swarm
morphing my way in and around the crowds in the most popular 5.0 and
5.1 halls housing the German publishers.

Hall 8.0, the US, UK, and Israeli hall is sort of a quiet refuge. It is a mini-
mini BEA. The booths are the same in structure, except at Frankfurt they
are called stands. Otherwise add noise and three times the number of
publishers and you could just as easily be at our New York, Los Angeles,
or Chicago conventions. It is nice to see familiar faces. To chat with
colleagues I have made over the years in Frankfurt and only see there.

Though we may not do any rights business together, it is still nice to catch
up. That is what I miss the most about not being in Frankfurt this week. It
was, like for most of us these days, a decision made most prudent due to
the Great Recession.

I have an author there though. Rebiya Kadeer, a Chinese dissident, is one

of the speakers on a panel discussion in opposition to China being the
Guest of Honor. Rebiya is the author of Dragon Fighter: One Woman's
Epic Struggle for Peace with China. Perhaps you've heard of it? She
received major media attention as president of the World Uyghur
Congress. Pronounced "Wee-gurs", yes the same Uyghurs you have seen
in the news over the last few months shackled in communist oppression
and victims of genocide committed by the Chinese government. I briefly
thought of going just so I could stand beside her and protest. I wanted to
walk into the Chinese stand and introduce myself just to see if they would
call me a terrorist or a "separatist" like they do Rebiya and His Holiness
The Dalai Lama. I want to tell them to quit abusing my author even though
she is extraordinarily capable of standing up to them herself. Still I want to
be there for her, Uyghurs, and for all people who suffer from atrocities
against humanity. Instead, I think I'll say a prayer for my author.

You see I love all of the books I publish. It is really a prerequisite, possibly
for all small publishers too. If you don't love the book, how can you sell it?
My passion for each and every book is in part why I am told by others how
successful I am at garnering so much media attention for Kales'
publications.

Frankfurt would have given me a more global perspective no doubt. And I

need that. Because I won't even pretend to know the answers for our
future. And I'm scared. I simply don't know. But there are a few things I
am willing to put myself out there for without the benefit of having enough
information -- most of it relates to common sense and something many of
you will remember about our industry from a time gone by; and that is the
art of being ladies and gentlemen in an often brutish world. While we craft
e-mails beginning with "Dear" and closing with "Best wishes" or
"Regards", the rest of the world seems to peck out staccato-like
sentences, misspelled, and written in a flurry. We, in publishing, have
largely maintained a sense of decorum with our writing. I suppose like a
dentist must have a nice smile to be believable. I think it is fairly unique to
our industry. I hope that we can maintain that level of civility and manners
as Twitter, Facebook, and blogs have come to largely define the general
decorum in communicating on the Internet. So by following what has been
traditional for us in communicating with one another is a way I think we
can distinguish ourselves from other industries. Industries we are often
compared to such as music and video -- both of which have collapsed
into the ether business model.

Related to this, I think there are some other things we can do to help
ourselves as publishers. The first place I would suggest we look is not just
at ourselves as most of us are doing in trying to figure out where the
industry is going, wondering if we will survive when people certainly
smarter than me, and perhaps you, have gone out of business or lost their
jobs.

I suggest we look at how we can help two of our primary partners, book
retailers and book printers. After all, though we are certainly in a difficult
spot, personally the most difficult time I have had in my ten years in
business, we are still in a fairly strong position as content providers. If you
look at yourself as a content provider, then the channels of distribution for
that content are the primary areas under greatest distress now. Not the
content providers. We can still do what we do best -- acquire quality
content, shape it, package it, and market it. Whether it be on paper or on-
line, the first two areas of our working lives, acquisition and shaping,
remain largely the same. The content provider is still an integral, in fact
central and indispensable component of the media global transition we
are facing. The latter two areas, packaging and marketing, are in the
greatest flux as we debate the merits of paper and e-books. Thus our
cousins in this industry, book retailers and book printers are far more
vulnerable than we are. We still own the content. We still sell the content.

First a few words about book retailers. They are our friends generally
speaking. I feel confident in saying that about independents. I feel our
friendships with the major chains are more complex as we find ourselves
in competition with them in some areas. Areas such as some of them
having their own publishing programs. In at least one instance I know of a
major book retailer having entirely replaced a well-known study aid imprint
with their own imprint. There are other examples I can mention but for the
purposes of this article, I would simply like to express that our major retail
partners are not angels and neither are we. Independents are our most
reliable friends in terms of equitable partnerships, but of course the
percentage of sales from them is smaller than those from the majors. Thus
we have to make compromises.

One compromise I suggest is that as publishers we no longer sell directly

to the public. I know how tempting it must be to have that "click to buy" at
full list price without any wholesale discount. But in essence we are
picking a fight with our retail network. A network we depend on. A network
that rises and falls with us. A network that affects the small independent
bookseller, in most cases those who are just innocent bystanders. I
personally see direct selling as a bad business decision. I see it as
undercutting our retailers. I see it as myopic. I see it as unthoughtful as
retailers ramping up their own publishing programs to compete with us.

We must make a new peace with our retailers. In this difficult time, I
suggest we see how we can help one another rather than pitting ourselves
against one another.

In my negotiations I try to find a win-win conclusion. I don't seek the

upper-hand and I do my best to fend-off someone else trying to get the
upper-hand over me. So perhaps we can make an industry concession to
our retailers not to sell directly to customers, I might add they were the
retailers' customers long before most publishers who participate in direct
selling ever came along. Yes, they are our customers too. We share them.
But a retailer is better equipped, better merchandised, and better
customer-service oriented to satisfy the direct sales of our books.

So what can retailers give in exchange to bring this proposition closer to a

win-win? Not a new idea at all--buy on a non-returnable basis. As has
already been pointed out many times by many people, the return system
in place is not a healthy business model for us. Furthermore, with
government and society finally taking environmental issues to heart, we
can squarely identify returnable books as anti-green and wasteful.

I suspect that if we can reach an industry agreement, a concession by

both parties, then we will have smaller press runs but more profitable
businesses. We are one of the lowest earning industries based on
investment and return on investment. That in itself is a problem. We need
to make publishing more profitable. It simply must be. By eliminating
returns, we can better and more accurately control our inventory levels.

Less money tied up in inventory is more money in our pockets. I think part
of the reasoning behind this flawed returnable model is that we are
deluding ourselves into thinking that we are more like commodity
manufacturers rather than artwork manufacturers. In the first case it is like
toothpaste. In the second case it is like fashion.

I believe we sometimes think we sell toothpaste and would generally

rather overshoot supply than risk losing out on demand. Toothpaste can
be put on sale and re-packaged, sometimes even at buy-one-get-one-
free. Frontlist books can not.

Fashion on the other hand, and as an interesting side note the design
firms are also called "houses", i.e. The House of Chanel, offers us some
guidance. Their business model is to present samples of their upcoming
season, just as we do blads and catalogs, take orders from their retailers
for each garment and in which sizes, and then manufacture at one time,
just as we have a first press-run, the bulk quantity of that season's orders.
They do a little overage in some cases but it can not be counted on.

Why is it the best idea for us to fret over supply to meet an unknown
demand with our print runs? In the fashion industry, they manufacture to
the demand and not beyond. Clearly, in some instances if there is a hot
garment then they manufacture more, similarly to our second or third
press runs. Otherwise when the garments for that season are sold out, the
consumer has missed out. Now with the Internet, perhaps that fashion
style could be found used somewhere.

Can we adopt a similar thought process if not the actual manufacturing

process? We already have a secondary market in place -- used books.
And now we are in the midst of another secondary market -- digital books.

I think there is an overdependence on remainders. It is "airing our dirty

laundry in public." Those are the books that did not sell well enough to
merit the print run. Any analysis makes us look bad -- either we released a
bad book that the market deemed was not worth buying or we released a
good book that we unsuccessfully published. Perhaps it is a combination
of the two. In any case, remaindering devalues our product, our profits
and our retailers' profits because why buy a new book when you can get
one for 75% off in the bargain section, our author's reputations, and our
confidence in understanding our readers.

To reiterate one point about our remainder dependency, the waste in

production and transportation is opposite to an eco-friendly environment.
If publishers value sending out e-mails with little reminders at the bottom
"Do you really need to print this out? Be Eco-friendly," then please be
consistent and don't overprint your books. I realize there is already a
movement toward lower print runs. However I believe it is due to
economic hardship now and not a business model.

By working hand in hand with our retailers on a non-returnable business

model in exchange for publishers not taking retailers' customers by selling
directly, we can make our industry more profitable. One footnote following
this example with the fashion industry, we already have in place
something similar for co-editions. Also with packagers. With co-editions
for those of you not familiar with the dynamics of reaching an agreement,
the originating publisher -- let's say for example they're from the UK -- has
costed-out the project and know they need a 10,000 copy first press-run
to be viable at an affordable retail list price. If this UK publisher can take
4,000 copies themselves then they need to sell rights for co-editions to
gain another 6,000 copies. Their likely co-publishers are American or
Australian publishers. If between those three markets the UK publisher
can reach the 10,000 copy print run then the book gets published. (The
printer simply changes out the copyright page, title page, spine
imprimatur, and jacket.) If the UK publisher cannot sell enough co-
editions, then the book is cancelled at least for the time being.

Once we look at this existing common practice with co-editions then

perhaps by expanding and modifying it to other trade books we can then
understand that wisdom of self-restraint.

Now on to printers. Whether printers are our friends probably depends on

your experience with them. I generally consider them to be friends. They
have helped rush a book though the bindery in less than the usual two to
three weeks, negotiated for better paper prices, made last minute
corrections, etc. (I'll save my horror stories for another time.) The printers
are facing tough if not tougher times than us. They have been with us
since Johannes Gutenberg himself. It is not right to let them dangle in the
wind while, as I mentioned earlier as content providers we have more
leverage in the marketplace.

I am not calling for a "Buy America" campaign. But rather a "Think very
carefully before going overseas" campaign. Five years ago we realized
about a 30% savings including freight and tariffs for printing illustrated
books in China. Now, due to intelligence and the competitive nature of
American printers, as well as the tendencies of Chinese printers to have
chiseled away at that tempting 30% differential, prices are about the
same. In fact, after the books leave on a slow boat from China, when you
add in importation fees namely paying longshoremen and truckers in New
York or Los Angeles (Long Beach) to unload and deliver your books to
your warehouse, I think it has become slightly more expensive. Truth be
told, there is still about a 20% savings by printing illustrated books in
Canada. Furthermore, Italy produces the most beautiful artistry. If your
budget permits, for 20% to 30% more Italian printing craftsmanship is well
worth it.

By giving more business to our American printing colleagues, we help

keep them in business, and they help keep us in business with cutting
edge technology that reduces our costs, relatively short turn-around times
compared to the usual three month delivery time from Asia, peace of mind
about the security of our work not being pirated, and economic justice.
American printers work here, pay their mortgages here, buy their groceries
here. Someone, somewhere in America is impacted by the printing
industry, at least through the real or fabled "six degrees of separation"
who also wants to buy your book. The circuitous economy is obvious.

I would like to address economic injustice aspects at some other time. But
for now, briefly, I have been in a Chinese book manufacturing plant in
Shenzhen. I am sure there are others of you who have also gone on press
in China too. When I was there years ago, the workers were paid on
average $16.00 per week for 12-hour workdays, 7 days a week. Today it is
widely reported that 60% of Chinese citizens live at or below the poverty
level while the top 10% live rich lives as government officials and powerful
business brokers, both groups collecting more in bribery money than in
salary as reported by human rights organizations. In conclusion, on moral
grounds alone, please help support American printers.

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