Friday, October 1, 2010

Publishers as Risk Aggregators

Free-form Friday

It's comforting to believe that there's something inherently noble about books; that pages covered with words and stitched together between covers represent a repository of the thoughts, compressed and distilled, of others.

I think that's why we find the dissonance between books and the businesses that produce them fundamentally disconcerting, particularly in the way in which content seems a secondary concern at best.

One of the most important things I learned as an anthropologist is that there are almost always reasons, usually structural for why things are the way they are.

Coming to publishing from a career in high-tech, it didn't take long to notice the similarities between publishers and venture capital firms. Venture capitalists, for example, expect only one in ten of the companies they fund to succeed.

The structural role of publishers and venture capitalists is explained well in a post I came across about the role of big record companies by "A Photo Editor" that included the following quote from the Adam Carolla Podcast:
What record labels are really good for is essentially risk aggregation. It’s a very small percentage of bands that get to the level of being signed and even of those people who’ve gotten past that very high bar only about 5 percent succeed. So, 19 out of 20 fail. If it was your own money, you would be a moron to spend it, because there’s a 95 percent chance that money’s not going to come back even if you’re already at the level that record labels want to sign you.
So, the only way people can make that bet is to conglomerate all of them. You sign 100 bands and assume 5 of them are going to succeed and the other 95 fail you just need to make enough back from those 5, which is why record contracts are so onerous in the first place for successful artists, because the money you are now making is paying for the other 95 percent who failed.

Somebody needs to be doing that risk aggregation unless we only want the independently wealthy who are artists.
Here's the punch line:

Why must publishing companies be risk aggregators? Because no one, absolutely no one, really knows what will sell.


Image: Photography by BJWOK / FreeDigitalPhotos.net