New frontiers

The e-book era has clearly arrived, but can publishers' digital revenues grow fast enough to offset the worldwide decline in sales of physical books? About half of all books are bought on impulse—sales that result from attractive displays in inviting surroundings, which are readily accessible to the most literate, well-heeled customers (aka "the heavy book buyer"). When Borders' 200 stores close, I doubt that any more than a third of the lost sales will be recovered through other channels. The US market will therefore shrink by 2%–3%, but the effect will be much worse for certain publishers.

The potential for salvation from online booksellers and supermarkets looks limited too. Online retailers are great for customers who know what they want to buy, but they have yet to find sufficiently powerful ways of creating impulse sales. Tools such as contextual advertising, driven by previous browsing habits will help, but there is a long way to go to match the serendipitous discovery facilitated by traditional bookshops.

Meanwhile, supermarket shelf-space is a precious commodity; any softening of sales densities quickly results in reallocation to another product category. Tesco's latest ploy of asking record labels to move to a consignment stock system ("we'll give you 50p up front and pay the rest if and when we sell the CD") will not only rattle publishers who fear the spread of such tactics, but shows just how competitive that internal market is.

The concern is not just the quantity of shelf-space allocated to books, but the quality too. Sky-high rents are driving books out of Britain's best shopping centres, with Foyles at Westfield having closed one of its two trading floors. In a few years, the distribution of physical books could be right back where it was 20 years ago, with W H Smith and a few Waterstone's the only outlets in high-traffic areas, with most Waterstone's and independent bookshops relegated to secondary side streets.

Publishers, therefore, need to balance their distribution strategies carefully. Of course they should continue to nurture the existing channels, while protecting themselves from the possibility of further bad debts. But they should also aggressively seek new channels—perhaps their own—to reach end consumers of both digital and physical books. It will be hard to find the middle ground between diminishing traditional distribution channels, and ceding all your end consumers to the global behemoths of Apple, Amazon and Google. But that is surely where long-term profitability lies.

In his speech at the APA annual meeting last month, Barnes & Noble chairman Len Riggio expressed optimism that digital would provide incremental growth, and that the market was "readily expandable". That expansion will need to be very powerful indeed to counteract the shrinking market for physical books.