The Future of Books

BusinessWeek offers an interesting inside look to the bankruptcy of Borders. The perception that many people had was that this was a blow delivered by Amazon and ebooks, that there is no future to the bookstore. It might be true but the Borders case is not a good case in point, argues this article.

The piece points out that the store it is profiling here was actually very profitable, and increasingly so in the last few years. In fact, more than half the stores were in the black. The reason it closed was entirely due to the overall financial health of the company and a series of bad management decisions. It expanded insanely and wildly during the boom years, gobbling up ever more real estate as prices were soaring. When the bust hit, prices crashed and its investments in physical space suddenly looked stupid. This put massive pressure on the operation. It could no longer sustain its profitability expectations and its belief that the boom would last forever didn’t materialize. There were also a series of too-little-too-late decisions regarding digital media.

I find this account very persuasive. People without knowledge of the way business works always assume that any company that is going belly up was flopping, that people just weren’t buying the product. That is not usually the case. What it means is purely a matter of accounting: costs outran revenue and expected revenue. That can happen very easily with a few, small miscalculations. No matter how much success you are experiencing, it is the cost accounting that ultimately matters. This is true regardless of whether we are talking about a multinational with $5 billion in sales or the lemonade stand down the street. Every firm faces the same cost/revenue matrix.

Cost accounting rules, whether big or small, and this is true for everyone. This is the great egalitarianism of the market that is hardly ever noted or noticed by people who know nothing of business life.

To be sure, the book business must and will change, and dramatically. The old-line publishers will be buried. Laissez-Faire Books will be on the cutting edge. (Unpaid advertisement: please like Laissez-Faire Books FB page!)

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  • This is yet another example of the tragedy of central banking. The Federal Reserve created the environment for these investment errors to occur.

    It’s also an example of how important it is to understand the Austrian Business Cycle Theory. Had the Borders management understood what was happening, they could have anticipated better than they obviously did.

    • This also highlights a shallowness in much of the left-libertarian criticism of corporations, who imply that profits are not earned, or are so easy to earn. The truth is that the state’s depredations–taxes, regulations, inflation, etc.–add untold costs onto businesses, making the line between bankruptcy and success even more precarious. Suppose the costs imposed by the state on the economy, consumers, and business, were cut in half. Borders probably would not have gone bankrupt as it could have absorbed more easily the cost of its mistakes.

    • The origin of the current wasteful publisher/brick-and-mortar bookstore relationship is also interesting. The strip-and-return system has its origin in the Great Depression (thanks Fed!).

      Publishers wanted to encourage booksellers to buy more books and take a chance on unknown authors, so they stupidly started allowing stores to return unsold inventory for a refund. This system became entrenched and publishers became stuck producing massive print runs. The tendency to gamble on publishing and stocking potential blockbusters is tied in with this.

      What the booksellers do — with paperbacks at least — is strip the covers, return those for the refund, and recycle the book bodies. Book prices factor in this waste. I think it’s something like one hardback is priced to pay for two, one paperback for three. Because so many are not sold. Sometimes, before being destroyed, a book will go back and forth between store shelves and warehouses in a purchase, return, purchase, return cycle until it is finally sold or destroyed. Lots of transportation and storage waste there in the interim.

      This system has hurt small presses and indie and self-publishers because booksellers often insist on this strip-and-return policy and they often can’t afford it. And the small indie bookstores can’t afford gamble on large inventories of books and to wait on refunds on the inevitable returns. So you get that concentration of power in a relatively small number of big publishers and bookstore chains.

      Thankfully, the rise of POD and ebook publishing is disrupting this wasteful, cartelizing system.