Business Musings: All Romance Ebooks & Visions of The Future Part Two

The indie publishing world remains stunned by the sudden closing of All Romance Ebooks (ARe), an ebook distributor that had looked—at least in the beginning—like it was very successful. Maybe it had been, and had simply been undercapitalized (which is my guess).

But whatever the reason, ARe closed its doors on December 31, 2016, and is now dealing with a heck of a financial fallout.

If you’ve got books or income tied up in ARe’s closing, please look at the previous post. Even if you don’t, you might want to examine that post anyway, because when I conceived of this post, that 3,000 word blog post was just going to be a few paragraphs of introductory material.

Ooops.

ARe wasn’t the only venture to go belly-up in 2016. A couple of other companies that got their start as some kind of support, or “new” business model based solely on the indie publishing revolution also liquidated in 2016. Another—Booktrope—vanished fast as well, although unlike ARe, Booktrope gave its suppliers a month to handle the loss. I wrote about Booktrope for Closing The Deal…On Your Terms, the book I published last year on the business side of publishing. You can read the initial post for free here on the website.

I think the loss of Booktrope was actually a blessing in disguise for all involved, because the greatest harm would have come to the writers (and others) if they had had a bestseller published through Booktrope. The contract was just that bad.

But I’m not here to discuss the merits or lack thereof of Booktrope or ARe. I did that in other posts. What I need to discuss here is the future.

You see, these closures were right on time. And several other closures will follow in the next few years.

Some of the upcoming closures will be predictable. And others will catch us all by surprise.

Why am I saying this?

Because three different factors are coming into play in the next few years. These three factors intertwine, at least in the indie publishing industry, which will amplify the result.

You’ll need to bear with me. This will take some explaining.

One note on terminology. When I say indie publishing, I mean the non-traditional side of the publishing industry. Indie publishing encompasses the self-publishing revolution which started thanks to Amazon and the Kindle in 2008. (Amazon released the Kindle in November of 2007, just in time for holiday giving.) Some writers still self-publish, but many use services or have created their own publishing companies to publish outside of the mainstream infrastructure. Hence, indie as in independent. (What confuses all of this was that, back in the day, many small but traditional presses called themselves independent presses. I’m not talking about them. I’m talking about publishing that could not have happened in 1985.)

So, what are these three intertwining factors that will impact us in the next few years?

They are:

1. A gold rush
2. An investment bubble
3. A business cycle

Each has patterns so clear that a thousand books have been written about those patterns. You can find the patterns by Googling, or (in the case of gold rushes) by watching the History Channel.

Let’s start with the gold rush, because everything starts when someone discovers a shiny hunk of metal hiding in plain sight.

The ebook revolution wasn’t a literal gold rush—there were no creeks, no slipping hands in ice-cold water to shake gold flakes loose from bare rock in a little makeshift pan.

What there was were a few frustrated writers who used Amazon’s easy Kindle interface to upload books that these writers either couldn’t sell to traditional publishers or were too afraid to try to sell. And because the Kindle was such a nifty device and because there wasn’t a lot of content, back in them thar days (nine years ago), these books took off. Writers who had books with bad covers and poor copyediting sold and sold and sold because those writers could tell good stories.

That gold rush analogy holds. It was easier then. Yes, you had to separate the gold from bare rock yourself (sometimes the gold was embedded), but it was easy to do.

Gold rushes follow a pattern. The pattern goes like this:

1. The work is so easy that anyone with the desire can do it with little or no capital outlay. It takes being in the right place at the right time with the right set of skills. (In an actual gold rush, the first skill was patience and the ability to touch ice-cold water for hours at a time.)
2. The tools improve. They remain easy to use. There’s a capital outlay, but it’s still tiny. Again, right time, right place, right set of skills. (In an actual gold rush, the miners built sluicer boxes that quickly separated the gold from the rock. The work with a sluicer box was faster than work with a regular pan, and much faster than working by hand.)
3. Outsiders notice and want in. That’s where the word “rush” comes in. Everyone wants a piece of gold sitting on the ground. It’s easy. Everyone will get rich!
4. With the outsiders come the side businesses. These businesses make it “easier” to do the work. Some actually do. Some fill a need—like the general stores that rose up around the mining camps. Others are scams, trying to take gold away from the miners. (Or money away from the writers.)
5. The easily attainable gold goes away. Now, it takes some work to make money. In gold mining, the workers actually had to start mining for gold (yes, there were other steps here—establishing claims, etc. They’re no longer relevant to our discussion). It also takes money to do this work, not a lot, by normal business standards, but still more than some people have.
6. The operation goes from low capital with small (or no organization) to large capital and big operations. The small workers who started all of this become one of three things:
   1. big business owners (and rich);
   2. workers with expertise…for someone else
   3. retired or bankrupt or moving on to the next crazy idea
7. The gold rush is a distant memory but it has changed the landscape forever. New towns exist. New jobs exist. New wealth exists. New businesses exist. Lost in all that newness is the destruction of old businesses and the people who suffered lottery luck. (Lottery luck: they win riches, then spend it all, with no hope of ever having money again.)
8. Small business becomes Big Business becomes The Way We Do Things Around Here. You see that in the American West, more than 150 years after the gold rushes of the 19^th century. Mining still exists. Heavily regulated, with a ton of problems. States exist where there were only territorial governments before, because of mining. And so on and so forth. Indie publishing is decades away from this one.

So…let’s translate this gold rush into indie publishing.

1 & 2 occurred from about 2008 to early 2011. People found gold by putting up great stories, even if those stories weren’t wrapped in pretty packages.

3 & 4 occurred from late 2010 to late 2012 or so. The get-rich-quick stories were all over the media. Tons of writers decided to try this new scheme, and many were successful. However, traditional publishers realized they could publish successfully on these platforms as well, so readers got to choose between high-priced books in pretty packages, medium priced books with adequate packages, and ugly books (with great stories) by unknowns. Some readers stuck with the unknowns, but most readers went to familiar names or pretty packages. However, price became a sticking point. No one wanted to pay more than $10 for an ebook, if that. The world was already starting to change.

At this point, too, the outsiders came in to make life easier for the writers. A lot of those businesses came and went, often within a year or less. But others, like All Romance, looked pretty solid, at least at first. They too were having a gold rush, but of a different sort. They were making money off the phenomenon, doing support work rather than the actual work. Hold that thought…

5 started happening in 2012, but became really clear in 2013. By 2014, writers were quietly leaving because they hadn’t gotten rich. The trickle of writers who disappeared became a flood in 2015, and maybe the forgotten story of 2016. They’re gone, those get-rich-quickers. They’re doing other things.

6 started right from the beginning. Hybrid writers realized they needed help because they wanted their products to look like traditionally published products—good covers, good copy editing, nice interiors—and hybrid writers didn’t want to do it all. So a lot of writers invested money in their own companies right off the bat.

That’s different from the 19^th century gold rushes like the ones in, say, California. Because a lot of professional writers came in with a raft of tools and employees and set up operations that were professional right from the start.

Other writers had to establish professional businesses and spend money starting in late 2012 and continuing. Many figured out ways to do so by trading services. But it still cost more to get into the game in 2016 than it did in 2009, and readers (customers/consumers) have higher expectations now than they did back then.

7 started in early 2016. I haven’t heard anyone say they expect to get rich from indie publishing in 2016. Everyone knew it was work; everyone knew they had to invest time and money into what they were doing; everyone knew they could make good money if they worked hard, but didn’t seem to consider wealth a viable option any more. It is, but the myths are rising, preventing some writers from taking advantage of the opportunities that still exist for capitalizing on this ever-changing business. (Yes, more ideas for blog posts.)

As I mentioned above, we haven’t hit 8 yet, but we will. Eventually.

You all understand the gold rush, right. Now, let’s step away from that and move to investment bubbles.

We’ve gone through a lot of investment bubbles in the past 25 years. Tech bubbles, housing bubbles, stock bubbles—they all have a pattern.

This pattern is not as obviously connected to indie publishing, but bear with me.

Here it is, the life cycle of an investment bubble. (If you want to read about this in-depth, go to Investopedia.)

1. Displacement: Something happens that changes an industry, something that investors will eventually notice. Introduction of new technology, for example, might make some work easier. Consumers change their behavior for a weird reason. Whatever it is changes the way things are done, and investors start paying attention. Some get in on the ground floor.

2. Boom: Everyone wants in. Everyone wants to invest money in this new thing, whatever it is. The increased investment spurs growth, but that growth isn’t natural. There is a natural growth curve, but it’s being masked by the enthusiasm.

3. Euphoria: We’re going to be rich! Forever! It only takes a few dollars. Or as a friend said to me during the real estate bubble, parroting what he heard from his (now-out-of-business mortgage broker), Real estate always increases in value. It never goes down. Yeah, right. And I know of this land in Florida…oh, wait! I’m referencing yet another bubble (from the 1920s).

In other words, no one researches anything. Everyone throws money at this hot thing, thinking they’ll make a killing at it. This is different from a gold rush, in that we’re talking about people with money to invest, not people who will do the actual work. Keep that in mind.

4. Profit Taking: Smart investors leave. In fact, some of them left before the euphoria started. But people who have been doing this for a long time recognize the euphoria for what it is and get out at the height of the market, selling their holdings for a profit. Stupid money stays. And believe me, there’s a lot of stupid money in investments.

5. Panic: Yeah, you know this one. We’ve all seen the movies about 1929, where people jumped off buildings because they lost everything. (Not that such things actually happened, but they could have happened.) We lived through 2008-2009, which was a panic as well. People want their money now, and they want what they put into the investment, which is no longer possible.

6. Never Again: This isn’t on Investopedia but it’s there. A lot of people, burned by the bubble, will never invest in that particular business again, whether that business is stocks, real estate, tulips, or technology. The romance is over, the possibilities are dead.

How does an investment bubble relate to publishing’s gold rush? There are two points of entry for investors into a gold rush. The first is #3: Outsiders notice and want in. Non-writers think they can profit on this growing phenomenon by helping writers with their businesses, by giving loans or doing other forms of investing.

The second point of entry is #6: The operation goes from low-capital to high capital. At this point, the gold rush is established and everyone knows about it. Even investors who don’t read knew what was going on in publishing. I had several angel investors approach me about my writing or WMG Publishing in 2014. I could have had meetings with venture capitalists who were willing to put $10 to $20 million into my publishing business—for 50% of the profits. I didn’t laugh. I made note of where we were in the investment cycle. Then I laughed—and did not take the offers.

The third factor we’re dealing with right now in the publishing industry is the natural business cycle. Again, this is something you can Google. Most list seven stages of a business cycle, but I found a great article from The Harvard Business Review, an article published in 1983, that lists five.

I love this article, so much that I shared it with friends. It lays out everything in depth, and it’s based on quite a bit of research. I also like that it predates the modern era, because people don’t get caught up arguing that the research is new so it can’t be true.

Here are the five stages, according to Neil C. Churchill and Virginia L. Lewis:

1. Existence. At this point the business comes into being, and will discover if it can actually exist in the marketplace.
2. Survival. Can this business survive? Not thrive. Just make it day to day. As the article says, at this point, “formal planning is, at best, cash forecasting.” A lot of businesses remain in this position for their entire existence. (Decades, even)
3. Success. The business becomes stable and profitable. The owners must then decide if they’re going to expand or remain static. Sounds like an easy decision, but it’s not. Churchill and Lewis break this down even more, but for our purposes, we’re sticking with the above definition.
4. Take-Off. The business grows, often exponentially. This is a scary period, because the business had reached stability and now it feels like the business is back in survival mode. In fact, this is the most dangerous place a business can find itself in. Mismanaged, a business will tumble from here to survival or bankruptcy. And that can happen damn near overnight.
5. Resource Maturity. The business is established. It can forecast both its profits and its year with some kind of accuracy. It can plan its future (barring unforeseens like meteors falling from the sky or investors tanking the economy a la 2008/9). To quote Churchill and Lewis:

The company has now arrived. It has the advantages of size, financial resources, and managerial talent. If it can preserve its entrepreneurial spirit, it will become a formidable force in the market.

They mention something else in this section, which I am going to give its own number.

6. Ossification. The business hardens into a risk-averse, top-heavy organization that cannot change with the times. Again, from Churchill and Lewis:

[Ossification] seems most common in large corporations whose sizable market share, buying power, and financial resources keep them viable until there is a major change in the environment.

I kept ossification here because it perfectly describes traditional publishing. And the sentence after the quote above describes what’s going on right now:

Unfortunately for these businesses, it is usually their rapidly growing competitors that notice environmental change first.

What’s going on with traditional publishing is outside the scope of this blog post. But you can see it, right?

I’m telling you about the life cycle of a business, not to help you with your writing business (although you can probably see yourself here) but to think of all of those outside businesses that have attached themselves to writers who want to indie publish.

We’ve already seen countless business go out of business because they couldn’t survive the existence phase.

Most businesses that started to augment indie writers are now in the survival stage. This new environment hasn’t existed long enough for the businesses to adequately predict the future. They can only guess.

A handful of businesses, usually those run by entrepreneurs who have done this stuff before, have moved into the success phase. WMG seems to be. We’re having discussions about the subpoints in the article for the first time ever.

But we minimized growth and did not jump into the takeoff phase, even when we could have done so. Those angel investors would have made it easy—or made it seem easy, at the time.

I think it’s too early to tell for any business that started around indie revolution to claim it’s in the success phase, simply because the disruption is still going on. We have to remain nimble to keep going with the changes in the industry. Again, though, that’s another blog.

So here we are in January of 2017.

Our gold rush is transitioning from Stage 6 to Stage 7. In other words, the business has become more expensive to run and getting rich quick is no longer possible. In fact, the gold rush itself might have moved into the distant memory phase of existence.

Our investment bubble has gone from Stage 5 to Stage 6. In other words, it moved from panic (and divestiture) to never again all in about a year. You want investment money for a business related to publishing? Not on your life, bub.

Our business cycle for non writers connected to the publishing industry has moved from 1 to 2. We know these businesses can exist, but can they survive? Survival isn’t based on the business environment. It’s based on the skills of management.

The problem for some of the businesses in the business cycle is that they cycled from existence to take off in a matter of months. Now these businesses are slipping back into survival mode, and most of them will not survive.

Got that? Most of them will go out of business.

Why?

If the writers don’t get rich, then the businesses that are making 10-20-30% off those writers don’t make money. Those businesses are hemorrhaging capital.

If the business managers/owners are optimist types who don’t understand the various bubbles and life cycles they’re in, they’re going to try to get investment. And they won’t be able to get real investment, because smart money left the industry years ago. Stupid money has lost its interest in publishing. And only usury types remain—the kind who give loans at 30-40%. These businesses won’t qualify for anything else.

Survival is all about cash flow, and managing cash flow is an art. The concerns of the business in the survival phase, according to Churchill and Lewis, are pretty simple:

• In the short run, can we generate enough cash to break even and cover the repair or replacement of our capital assets as they wear out?
• Can we, at a minimum, generate enough cash flow to stay in business and to finance growth to a size that is sufficiently large…to earn an economic return on our assets and labor?

Many of these side businesses will soon learn that the answer to those questions is no, because the flood of money is gone. The gold rush is dead, and investors want nothing to do with publishing.

Booktrope had a lot of capital from venture capitalists. Booktrope raised a mountain of money, spent it, and couldn’t get any more, which is why it went out of business in May of 2016.

As evidence keeps coming out about ARe, it looks like the owner thought the gold rush would continue forever. She spent well beyond her means, and took money from writers to pay for it. She couldn’t raise enough capital to make it to January 1, and realized it only after some kind of last-ditch attempt in December.

I’ll wager there were talks with investors, and examination of books, and a feeling of complete disbelief that the gravy train had ended. Abruptly. As gravy trains do.

For all of these businesses that vanish in an incredibly public way, there are hundreds of others that quietly shutter their doors. I know of cover artists who no longer do indie book covers, content editors who have moved onto other jobs, small publishers that have laid off all of their employees.

We’ve entered a new phase of the changes in publishing, and that phase is maturity. We’ll see badly run businesses disappear, writers who aren’t up to the difficulties of the career quit, and large corporations turn their attention elsewhere because profits in publishing have declined.

My advice from last week becomes even more important in this environment. Expand your income streams. Make sure you get revenue from a wide variety of places. In the next six months, make sure you’re not overpaying for services. Streamline your business.

Then be prepared. There will be more shocks to the system. Companies that seem established will go belly-up. Changes will be slower. Sales will no longer peak. Instead they’ll grow slowly.

This is what happens in a mature market.

We’re out of the gold rush, the investment bubble is over, and some of the support businesses are failing.

If we’re careful, we writers will survive. But we have to be aware and vigilant.

You can have a good 2017, if you plan for it. And planning takes into account the changes that occur in mature markets.

Booktrope and All Romance Ebooks were the canaries in the coal mine. Those birds are singing no longer. Pay attention.

It’s time to move.

I thought the new year would start slowly. I was wrong. I suspect 2017 will be a very active transition year for indie writers/publishers. Let’s hang on for the ride.

In the past few weeks, I’ve received a ton of support, with shares on the post about ARe, updates about ARe, great comments in my email, and financial support for the blog. The financial support came in the form of tips through PayPal, and longer term support through Patreon. For those of you who participated in all of this, thank you!

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“Business Musings: All Romance Ebooks & Visions of the Future Part One,” copyright © 2017 by Kristine Kathryn Rusch. Image at the top of the blog copyright © 2017 by Can Stock Photo / jeremywhat