How to Save the Publishing Industry, as per Henry Blodget

Despite Harry Potter selling 8.3 million copies in 24 hours, book publishers only sold 0.9% more books in 2007 than 2006--less than the country's rate of population growth.

How can publishers fix their business? Not by killing more trees. By radically retooling the business model.

Hardcover books should cost $25. And publishers should keep printing them--for people who want to buy them. Meanwhile, for everyone else, publishers should publish cheap electronic copies for 20% (or less) of the hardcover price.

$4.99 for a first run bestseller, downloadable to your Kindle, PC, or iPod--or simply readable on the Internet. The retailer keeps $1 or so, the author gets $1 or so, and the publisher takes home about $3. Some of that goes to marketing and some to overhead. And then you're left with the typical publisher profit of less than $1 (no returns, manufacturing, or distribution costs).

But here's what happens: book sales suddenly go through the roof.

Why?

Because you've made buying a book almost a no-never-mind. At $4.99, buying a book is like buying a couple of magazines: you can buy them on a whim and feel free to skim them. At $25, meanwhile, buying a book is like buying a two-pound guilt trip: Until you slog your way through it, you don't deserve to buy another one.

With a similar margin per book sold, cannibalization wouldn't matter. If publishers really wanted to get aggressive, however, they could cut book prices to, say, $1.99, compress all the revenue splits, and watch sales truly explode. Especially when they made available the out-of-print catalogs.

All that matters is the bottom line, and going digital could quickly resurrect the profit growth of the publishing industry. Unfortunately, right now, the publishing industry is obsessed with maintaining the status quo--which means print units and revenue.

Get over it folks. Time to get your butts out to Cupertino (Apple / AAPL) and Seattle (Amazon / AMZN), cut some real deals, and save your dying industry (and some trees, while you're at it).

I remember my finance professor at NYU explaining how, with the current return and advance policy, that everyone from publisher to bookseller had to mark up their prices to ensure they made their necessary gross margin. And although I don't necessarily agree with Mr. Blodget that sales will skyrocket as soon as prices go down with digitalization of all books, I do think that this is a growing market and a necessary direction for publishers to take.

To make the most profit of this change, publishers need to first fine-tune how to publish content on cross-platforms without further cost in translation, which is where XML and CMS comes in, and they need to figure out how to market to this new market.

And given how far some publishers have come, I don't think the industry is dead: it's just having a slow rebirth, which is only natural (ask any mother).