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The Riggio Manifesto
-- 4/3/00
B&N chairman challenges publishers to lower prices, eliminate returns, invest more

The following is an edited version of an address Barnes & Noble chairman Len Riggio gave at the recent annual meeting of the Association of American Publishers in Washington, D.C.

We sit at the dawn of the most exciting and promising century in the history of humankind. A century where the sum total of the knowledge of our universe can be accessed by any citizen, rich or poor, at the touch of their fingertips. Yet, amazingly, we also sit atop the reality that many of us have barely come to grips with the century we have just concluded. How long can we remain slow movers in this fast-paced universe?

Recently I gave a speech to the International Council of Shopping Centers in which I extolled the virtues of the consumer book market and the publishing industry which provided its underpinning. Never once did I confide in them my deepest fear--that absent dynamic, cathartic change in our industry, great expectations could soon give way to broken promises.

Indeed, if Marshall McLuhan were alive today, he would be urging this group to explore all of the infinite possibilities in the new global village he had envisioned. Achievers will abound in this new village. They will be characterized not by fear of the negative, but by conviction in the positive. Many will be in the enormously profitable business of content aggregation. Many, unfortunately, will not be known as publishers.

The previously neat and tidy lines between author, publisher, wholesaler, retailer and reader will become even more uncertain. Some in the distribution channel will not make the cut. As always, the choices must first be made by publishers. Their decisions will ripple into the marketplace at unprecedented speed. Never have the stakes been higher.

So I am making a plea for a comprehensive, high-level dialogue between booksellers and publishers, where virtually none exists today.

Granted, 1999 has, by and large, been a good year for most publishers. Sales and profits, I'm told, are up modestly to well at the major houses and good to very good at many of the smaller and niche publishers.

Time for celebration? Perhaps. But before you break out the bubbly, ask yourselves the following questions: Is the newly found buoyancy in the book market something to which you have contributed, or the result of some significant investments you have made? Do you propose to take credit for 1999's robust sales while some continue to point fingers at others for the self-described publishing malaise just two short years ago? Finally, are people reading more books as a result of your wisdom, or buying more books as a result of your savvy?

Let me begin by talking about what is good about publishing and what is good about bookselling. First, publishing:

From my perspective, the publishing industry is performing better now than at any time in our history. We have reached historic highs in terms of the number of books in print--and despite the cutbacks from some major publishers, we continue to publish more new titles with each passing year. This is good for the reader, better for the development of our culture and good, rather than bad, for business.

More significantly, we now have more independent publishers than ever before in history. These new entities are providing the entrepreneurial spirit which lights our landscape, and which promises to rekindle the very soul of the publishing industry.

For the past 20 almost uninterrupted years, the industry has grown. Some years better than others--but it has grown. More impressive is the following statistic: during the past 10 years, the percentage of discretionary income spent on books has risen by almost 35%. This increase occurred despite the proliferation of media alternatives.

And if the past is any indicator of the future, just let your imagination run wild at how much the book industry will grow as a result of the Internet. Not only due to the online sales of books, but also to the incredible demand being stimulated on these Web sites for the very books you are publishing. Just as movies and television have stimulated major publishing successes, the Internet has already become a major pump primer for this industry.

In summary, I don't see any reason to cry the blues for our industry.

Next, let's talk about bookstores. Is there a future in this business? What will happen to publishers if booksellers stop growing, or even cease to exist? Indeed, can booksellers continue to justify capital investments in a business which is described as having no future? How do we even access the capital and debt markets which are punishing all land-based retailers, never mind bookstores? And how do we keep our employees motivated and well compensated in an age where intellectual capital is fleeing to the digital world?

These are daunting questions, but put me down as an optimist. As you already know, Barnes & Noble did not just dip its t s in the Internet waters. We jumped in head first and, as usual, we gave it everything we had. Thus far, our results have been astonishing. Here are some worth discussing:

Last year we became the largest land-based retailer online, and Barnes & Noble is now the fourth-largest Internet retailer of any type; our share of the online book market has grown from 7% to 30%, and it continues to grow. More than seven million people visit our site each month, viewing over 100 million pages of book advertisements. Altogether, more than 300,000 affiliates have signed up with our site.

But amazingly, our retail book sales have grown as well. Comparable-store sales exceeded those of the year before. Yes, there is some cannibalization in the system--but overall the Internet is driving our business. Think of it not just as a replacement of store-based book sales but as a broadcast channel which creates more demand for our books. Also, think about this: on a day the press said that the primitive technology of e-books was not ready for prime time, we downloaded 173,000 copies of Stephen King's new work in just eight hours. And think about who your partners should be in this important new distribution channel.

Okay, so let's go back to the question I asked earlier: Are people reading more books because of your wisdom or buying more books because of your savvy? I would strongly argue that the key drivers to the recent surge in book sales are as follows:

One: The current economic expansion is on its record-setting eighth year. As a result, more new white-collar jobs have been added than at any time in our history. And the blue-collar working professional class is finally experiencing real growth in earnings. These two classes comprise more than 80% of the book market. They have more money and they are spending part of it on books. Not enough, I might add--but more than they used to.

Two: The rise in book sales, I believe, is largely attributable to the massive capital and marketing investments booksellers--not publishers--have made in the past five years. Investments in newer and better stores, investments in systems and infrastructure, investments in distribution centers and investments in the Internet and home delivery capabilities. In all, major retail and Internet booksellers have invested more than $3 billion in the past five years alone, Barnes & Noble accounting for $1.4 billion. This sum dwarfs the capital expenditures of all publishing houses combined. I know of no other consumer products industry where retail spending so far exceeds manufacturer investments.

As a result of this spending, we now live in a world where a megabookstore is located in every neighborhood in America and will soon sit atop virtually every desk at home and in the office. What better conditions could publishers hope to expect? Where do you think we would be if these bookstores hadn't opened?

And yet, the disturbing reality remains: book sales are inching--not surging--forward. Increases in sales are being driven by price increases and new store openings, more than by units sold or better products. The mass market business is plummeting, and this includes many categories of new hardcover releases. Yes, conditions are somewhat improved, but by any measure they should be a whole lot better.

What I propose we do is as simple as it is revolutionary. Here g s:

Book prices are too high, especially mass-market titles and new hardcover releases. We must lower our prices or at least lessen our price increases in order to dramatically increase sales.

Economics 101: Book demand is not inelastic.

Consumer Behavior 102: Rising prices, not television, not the Internet, have largely destroyed the mass market business.

We must eliminate returns completely. Returns are crippling to booksellers as well as to publishers. They are costly and result in higher prices to readers, and therefore, lower sales. Eliminating returns, under the right conditions, could produce robust profits for publishers and booksellers, and enable us to sell books cheaper, resulting in greater sales.

Publishers must spend more--not less--capital to improve their outdated infrastructures, and pay more--not less “ royalties to authors. It is they, not we, who provide the important research and development for our industry. May I also remind you that books must begin their journeys to your profitable backlists by first appearing as frontlist?

Reality 101: Absent the proper incentives, along with a rational and effective hierarchy of distribution, authors, enabled by new technology, will soon bring their works directly to market.

So there we have it, a simple and bold proposal:

Increase sales by applying basic economic theory. Lower prices mean higher sales.

Increase profits by applying sound business practices. Lower returns means more money in the system.

Combine the two and we get an increase in profits and return on investment. This enables and encourages increased investment, which, in turn, causes sales to increase.

These three factors working together, not alone, will produce the bounty of which I speak. More importantly, I submit, we've got to move quickly--on Internet time--or the sucking sound we hear will be the flow of capital deserting our industry. In short, we must create our own self-fulfilling prophecy, not perpetuate the outdated, self-liquidating business models, which are the current practice of far too many publishers.

Content, and content aggregation, once the exclusive domain of major publishers, will soon be up for grabs to all who are technology- and capital-enabled. Profits in this new techno-economic world order will flow to those with the vision to expand the market--not to those who merely serve as the consolidators of the misfortunes of others. Now, let's take a look at some of the things I've discussed and see if they hold water. We'll start with pricing.

Book prices are generally too high, especially mass market and newly released consumer titles. We simply cannot continue to raise prices on books the way college publishers have raised prices on textbooks. Here are some numbers to consider: in 1975, arguably the heyday of the mass market business, a mass market fiction title sold for an average of $1.85, 12% less than the minimum wage of $2.10 and 80% less than the hardcover fiction average of $9.40.

By 1995, which was about the time publishers were bemoaning the reduction in unit sales, the same mass market book sold for $6.99, 65% higher than the minimum wage ($4.25). Worse, since a hardcover fiction title was now priced at $20.25 on average, the differential between cloth and paper was reduced from 80% to 65%.

After presenting this evidence to one of the largest mass market publishers at the time, he came to an entirely different conclusion as to why mass market sales were suffering: first, he said, we booksellers were not doing enough to sell his books, and second, he concluded that perhaps hardcover fiction prices were too low. By changing the differential, he said, surely mass market paperbacks would seem like a bargain!

Well, he and others began raising the prices of hardcover fiction titles. Between 1995 and 1998 alone, these titles went from an average of $20.25 to an average of $25.50 By 1998, when hardcover fiction began to plummet and mass market sales continued to drop, he decried the malaise of the book publishing industry and speculated that people no longer had the time to read. My argument that the consumer voted down those price increases, of course, fell on deaf ears.

Another important point to me is the issue of price points. Am I missing something here, or do some publishers really miss the point? Look: $20.95, $21.95, $22.45, $6.45, and $7.45 are not price points--they are abominations. Why aren't publishers studying and testing these price points like all good retailers and marketers do? If they did, they would find out that you actually produce a falloff in net profits as well as sales when you price books foolishly.

For example, books priced at $20.95, $21.95 and $22.95 would produce a lot more sales, and a lot more profits, at $19.95. Alternatively, some books would produce a smaller decrease in sales, but a larger profit, if priced at $24.95.

Prescription: If the book is good, go for the higher number. Otherwise, price it where it is comfortable to the consumer.

Another sore point is the $6.99 abomination, which is worse than any nickel-and-diming I have ever witnessed. The genius who came up with this figured it was a sure-fire way to get a couple of extra cents in his pocket for every book he sold. If he paid attention to price points, he would have concluded that $6.99 and $7.99 were good price points for pantyhose, but not for the upscale product we are selling.

The point I am making here is that price points and book pricing are not the result of any studying or testing publishers are conducting. Nor are they the result of any dialogue publishers have with booksellers. There is no dialogue. Instead, publishers tend to act in a vacuum, pricing books as though no one has any choice in the matter.

And finally, if you are not talking to booksellers about the effects of pricing, then who are you talking to? When was the last time this industry commissioned a good objective study of consumer behavior?

Now for returns. Instead of complaining about the returns dilemma, why don't we sit down and do something about it? Toward this end, I am again going to call on the major publishers to pursue a meaningful dialogue with us. Our objectives should be to immediately test pilot programs to eliminate returns in this industry. In the process, we can rid ourselves of the debilitating prospects of ripping the covers off, and subsequently destroying good and valuable literature.

We can get this done if we work together. If we succeed, we can liberate the entire industry.

Finally, I would like to talk about capital investments, those which are aimed at producing and delivering greater products to consumers--not just gobbling up smaller or even larger competitors. I call this the zero-sum model of conglomeration. Buy out your competitor, and cut capital spending to the bone to pay for the debt service.

For the life of me, I could never understand how the same publishers who complain bitterly about their poor return on investments pay 15 and 20 times cash flow to buy any publisher that wiggles its tail.

Is consolidation the answer? If it is, I sure haven't seen any evidence of it. The only thing, it seems, which is sure to happen to consolidator publishers is that they, too, eventually get consolidated. I suppose it is all supposed to end someday when we get to one big publisaurus.

To illustrate my point about capital spending to produce market growth, let's look at another industry, namely video games, and see what lessons can be learned. Why is this industry soaring at a compound annual growth rate of more than 25%? And why is this industry going to overtake the book industry in sales within the next three to four years? Perhaps it will be explained by the enormous capital expenditures made by the likes of Sony, Nintendo and Sega, and the parallel expenditures by hundreds and thousands of small developers and writers of programs. Together, these industry giants and budding entrepreneurs are pouring billions of dollars into the development of this market.

One last point about the digital commerce industry, its impact on our industry and its willingness to make huge investments in order to grow the market. Recently, as you know, Gemstar bought NuvoMedia, the developer of the fledgling Rocket eBook. Well, Rocket Books will not be a fledgling company for very much longer, because Gemstar promises to distribute 10 to 15 million Rocket Book readers next year alone--even if they have to give them away.

This, my colleagues in publishing, is exactly the kind of imagination and vision I am talking about today... the kind of vision which, with rare exceptions, is sorely lacking in our industry. Let us proceed to develop this vision together.

Given the opportunity, Americans will buy more books, in more formats, through different channels, than anyone ever believed possible. All across the landscape of this country, consumers have embraced bookstores as a central part of their community, and enjoyed the treasures of the books you have produced. Now they are being delivered to their homes and soon they will be delivered online. This business is growing again, and this time we should not let it stop.

Let's keep our prices low, let's eliminate returns, and let's all of us put our money where our mouth is.

We do very important work.

Let us do it together!
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