Hachette’s new clothes

In buying e-book specialist Bookouture, Hachette is trying to make sense of a world turned on its head, one where its print book business is back in growth, but its e-book sales are in decline. The acquisition will surprise those for whom the rise in physical book sales has meant the e-book was finished; and annoy those who once expected new digital ventures such as Bookouture to kill off the “big five” trade publishers.

Actually, the purchase should startle no-one. Bookouture has been a business to watch for some time. Executives at the big publishing groups accept that staff will leave for similarly situated rivals, but I have been told that when they leave for the upstarts such as Bookouture it rankles. It hurts more when it is Bookouture, because in the e-book publisher’s strong growth over the past four years they recognise what they got wrong over the same period.

Bookouture was founded in 2012 by former Harlequin/Mills & Boon marketing controller Oliver Rhodes, and made its first book signing in November of that year. In 2013 it sold 81,000 e-books, in 2014 362,000, in 2015 it sold 2.5m e-books, and in 2016 4.2m (to October). When I last met Rhodes he was projecting sales to hit 6m in 2016 (the press release says Bookouture has sold 9m e-books in total). By contrast Hachette’s UK e-book business (like that of most of the major agency publishers) has been going in the opposite direction–from its height in 2014 of 14.7m to 2016’s 14.2m (one wrinkle, Bookouture’s numbers are for global e-book sales, Hachette’s numbers are UK e-book sales, its global figure would be much higher).

If you believe some of the gloomier analyses about the e-book market, Bookouture’s continued growth makes no sense. But that’s never worried Rhodes: nor does that the fact that its biggest customer (Amazon) is also its biggest rival (Amazon Publishing). Like the best kind of publishing businesses, it has simply (with apologies to Alan Bennett) “kept on keeping on”. In the context of Bookouture that has meant delivering strong sales for books such as Robert Bryndza’s thriller The Girl in the Ice, which hit one million sales in less than a year, and completing eye-catching deals with Kindle bestsellers such as Kerry Wilkinson and Mel Sherratt. In September the normally staid trade newspaper Publishers Weekly called Bookouture “Britain's Hottest Digital Publisher”.

Bookouture has profited from an e-book market many in the trade have misread. Amazon’s strong growth in Kindle sales from 2009 onwards led some to believe that digital sales would overtake and ultimately kill off print book sales; the threat level was later downgraded to trade titles, then to commercial books, and then finally to commercial fiction. But the big publisher strategies are still largely predicated on those early predictions, with agency pricing (fixed pricing for e-books) introduced first to stave off the likelihood of a print’s sudden collapse, and secondly to curb Amazon’s run-away growth. The strategy is to price e-books in line with their print equivalents so that the digital format does not gain a competitive advantage over what is for the major publishers the important physical market. However, such a rigid approach fails to take into account that some titles and lots of e-books appear to work better at lower prices; in short that the Kindle store is not the same as the physical book market. Rather than declining, the e-book market has splintered away from its print echo.

Bookouture––as with Amazon Publishing, in the UK Head of Zeus, Endeavour Press, Canelo, and numerous self-publishing writers––has grown in this strategic misstep. The methodology is not difficult to figure out, but neither has it proved attractive to bigger publishers. Whereas the average selling price of p-books has been rising (led by titles with lavish packaging such as The Essex Serpent), e-books sell well at much lower prices. The Kindle store is dominated by low-priced sales of commercial books aimed at voracious readers, not far off Rhodes’ original vision for his publishing house, and similar to the types of titles he sold at Mills & Boon. My hunch would be that the value of Bookouture's turnover is not much different from its volume figure: £6m on 6m e-books sold.

Bookouture has also looked for global brands: books and authors that travel, just as e-books do. Other e-book publishers have benefited from the same internationalisation of e-book platforms: two weeks ago print and e-book publisher Head of Zeus reported a 31% increase in sales, partly driven by its US e-books, which represents 22% of HoZ’s total e-book business. As a pure-play digital publisher Bookouture’s US business is an even higher percentage of its total, about 40%.

In buying a fast-growing e-book specialist Hachette is clearly trying to plug the gap it helped to create. There is nothing unusual in that, of course, particularly for big businesses: Hachette is an umbrella group made up of previous acquisitions, many of them at the time opportunistic. It bought Nicholas Brealey for its business books list; Constable & Robinson for its history; Quercus for Stieg Larsson; and Neon Play to figure out the apps market.

In Bookouture’s case it is also buying a countervailing force. Rhodes will become digital publisher of Hachette UK and will join the board of Hachette UK reporting to David Shelley, c.e.o. of Little, Brown and Orion. Rhodes will continue to run Bookouture and, says Hachette “by steering and advising“, also help increase e-book sales across the Hachette UK group. What that “steering and advising“ means will be interesting. Rhodes will have to wrestle with Hachette’s agency prices and its author contracts (Hachette sticks to the industry standard 25% digital royalty rate; Bookouture offers authors 45%), both of which make it difficult for Hachette’s own commercial imprints to compete for e-book only deals against, say, Bookouture.

In turn, Bookouture authors will benefit from becoming part of a much bigger publishing group, one with a genuine global imprint, and access to print (Little, Brown will now publish some of Bookouture’s authors in physical formats). The sale also solves an obvious problem for Rhodes: how to expand in a market that is no longer moving as quickly as it once was. Bookouture may have been run as a digital start-up, but its business model was hardly disruptive. Its launch was funded by Rhodes and his wife selling a property they owned: but to grow it would most likely have needed access to finance, but the days when investors were queuing up to throw money at bright new digital book start-ups are long gone. These markets have matured, and for most investors the punts they made never worked.

Bookouture also faced an Amazon-sized problem: like many e-book business and indie published authors, it is wholly reliant on the Seattle retailer for its sales (and growth). The bigger it gets, the more staff it recruits, and authors it takes on, the larger the ache at the back of the head. When Amazon comes for these publishers (as it surely will), one wonders what their counter arguments will be. Hachette will immediately add heft to any future negotiations.

Last, Bookouture would ultimately have faced questions about the print book market. It remains a large slice of the overall pie for any book, and remains the goal for many writers. In the past it had cut some print deals with Bonnier Zaffre, but Endeavour Press’ recent launch of a print book arm will not have gone unnoticed. The deal with Hachette allows it to continue to run itself as a pure digital imprint, operating under its own rules and meeting the e-book market head-on, with its business model reportedly ring-fenced. It will not need to suffer the compromises of print.

A senior publishing executive described Hachette's acquisition of the gaming company Neon Play as an example of Hachette UK c.e.o. Tim Hely Hutchinson playing up to his boss, the c.e.o. of French parent Arnaud Nourry, who has publicly stated his interest in looking outside 'the book'. That may be so, but rival publishing chiefs should be less sanguine about this deal. If Hachette’s purchase of Neon Play was about making a leap into the dark; the acquisition of Bookouture looks to be about letting the light in.