02 January 2007

A Bankrupt System

Last Friday, Advanced Marketing Services, Inc. declared bankruptcy in the District of Delaware (No. 06–11480). AMS is/was the parent of Publisher's Group West, the third-largest distributor of trade fiction (and, depending on how one measures, the third- or fourth-largest distributor of printed books). This is one of the first visible dominoes to fall that will have a significant effect on the publishing industry.

To begin with, let's get an idea of what I mean by "third largest." Unfortunately, the publishing industry does a darned good job of keeping critical data away from prying eyes. (If the publishing industry is as unprofitable as it constantly whinges, why do venture capitalists and the like — not famed for their pollyannish views — continue to acquire publishers?) One of those secrets is the distribution system. Since a massive consolidation during the 1990s (when the Department of Justice and Federal Trade Commission were still dominated by Reagan/Bush I supervisors), there have been very few distributors of printed books in the US. Just how concentrated that segment of the market is depends upon how one defines it.1

If one were to define the market as all books sold, it's really not all that concentrated. However, that definition includes a lot of markets that simply don't use distributors, such as professional and nontrade books, gift books, and so on. (That's not to say that no distributor will carry them — just that the publishers don't rely upon them.) The most coherent market definition of distributed books is "trade fiction." And the concentration there is astounding: the HHI2 is — depending upon the accuracy of the numbers — somewhere between 1700 and 2400. The two biggest players — Ingram, and Baker & Taylor — appear to have just over 60% of the dollar-value market share in distributing trade fiction.

What makes this worse for the publishing industry is the problems that small and mid-sized publishers have. To be honest, I have never been very pleased with the terms offered by any of the major distributors, even before the consolidation a decade ago. It's bad enough that payment isn't going to be for at least 90 days after shipping merchandise! The real problem is that most small publishers, and many mid-sized publishers, are seriously undercapitalized and depend upon relatively constant, predictable cashflow. Further, those small and mid-sized publishers are disproportionately bound to PGW. Or, rather, were.

Small and mid-sized publishers of fiction are thus going to have some serious cashflow problems during the AMS bankruptcy. That's not going to affect the Big Five (or their various imprints) very much. It is, however, going to hit their smaller competitors twice: Once in delayed and diminished cashflow, and once more because their books simply won't be sold until they change their distribution. And that's going to go through to authors, too.

Of course, the big publishers are going to find a way to benefit from this. I strongly suspect that the AMS bankruptcy will be used as yet another excuse to abuse the reserve against returns — asserting a need for a larger reserve, holding it for longer, and so on. And it won't take long to be an issue to show itself — since AMS declared bankruptcy before the end of 2006, royalty-reporting periods ending on 31 December will be affected.

  1. This should come as no surprise to anyone familiar with the merger-approval aspect of antitrust law. Market definition is everything; for example, it's the only way that the recent recorded-music mergers even had a chance of approval, short of Abramoff-like lobbying.
  2. The Hirschman-Herfindahl Index is a measure of concentration in a market. One states the market share of each of the top five market participants as a number out of 100, squares the individual results, and then adds the squares. An HHI of over 1800, under Department of Justice guidelines, indicates a concentrated market, and mergers and acquisitions under those circumstances are supposed to get "heightened scrutiny" if they increase the HHI by a further 100 points. That does not necessarily mean they will be rejected; the burden is on the market player(s) involved to show that in that particular market, any increase in the HHI will not have anticompetitive effects.