The Publisher
Publishers press, package, market and sell product through various sales channels,
distribution deals, comarketing and bundling with other partners, selling direct
to an installed base of end users, and selling through third-party catalogs.
The risks a publisher must face are product failures in the market, either because
of a lack of quality in the product or through poor decisions in sales, marketing,
pricing and positioning, the choice of the wrong distributor, or an inability
to take full advantage of the distributor's skills.
Publishers take the greatest
risk.
They carry the burden of 100 percent return privileges on products from all
channels. This is the case because retailers have 100 percent return privileges
to the distributor, which are passed directly back to the publishers.
The Distributor
National or affiliate label-level distributors order, warehouse and ship product
into retail locations. They also serve as the "bankers" in the relationship
between publisher and retailer, collecting receivables from major chains and
a vast array of smaller, independent retailers. Distributors carry the risk
of bad debt from their retailers. They carry the credit burden, administer the
infrastructure for invoicing and collecting receivables from the channel and
pay the publishers 60 days after receipt of goods -- even if it may
take the distributors themselves 90 to 120 days to collect.
There have been several changes
in distribution policy and agreements in the last year, reflecting the growing
market and an increase in certain risks.
Distributors also risk selecting a publisher who will fail, leaving them with
inventory that they cannot return. The relationship with publishers also involves
a lot of time and overhead devoted to "hand-holding" small publishers and investments
of attention to emerging markets. Distributors generally try to minimize the
cost of hand-holding and market development, but this is a serious balancing
act between practicality and indulgence of publishers' or retailers' egos.
Changes in distribution: New
risks, new attitudes.
Last year, distributors accepted as many products as they could, within reason,
so they would have a large inventory to justify their demand for retail shelf
space. This year, there are more products available, the market is stronger,
and retail shelf space is also growing as retailers reap the rewards of a growing
multimedia market. But the result for publishers is, somewhat ironically, a
more stringent set of business requirements set by distributors, who are more
careful about the products they choose. Many products, even some very good ones,
are being turned away because the publishers' business didn't look attractive
to distributors. Last year, several publishers went out of business, leaving
distributors with product they could not return. Now distributors are looking
for more strength in their publisher partners. Access to retail distribution
now requires that a publisher produce during negotiations:
Changes in channel strategy:
Rising above the noise
Last year, gaining access to retail distribution was the primary marketing and
sales goal for publishers, as it gained their products the visibility they needed.
Now, even though retail shelf space is increasing, so many more titles are being
produced that the "noise" in retail is intensifying. It is more and more difficult
for a product to be "heard" above the noise. Publishers entering the multimedia
channels today must assume that perhaps only 60 percent to 70 percent of sales
will come from retail. They must create other channel strategies to achieve
sales from direct marketing, catalog sales and bundling. It's a good idea to
consider hiring a representative firm to penetrate the channels not handled
by a distributor, such as mass merchants or the bookstore channel. More money
must be devoted to marketing each product, say 50 percent of development costs
each year, to build a presence in this growing, noisy market.
New contract terms
The contracts for distribution are changing, reflecting the shifts in the marketplace
and distribution policy.
Advances.
This is a buyer's market, so advances from distributors are generally lower
because the distributor's need for product is diminished.
National accounts co-op.
A new kind of cooperative advertising fund has appeared: 2.5 percent co-op for
national accounts, in addition to the standard 5 percent for general co-op.
These funds are generally earmarked for participation in the co-op programs
designed by the major retail chains such as Egghead and CompUSA.
Right of last look.
Certain affiliate label contracts will request the right of last look for the
distributor. Under this clause, after the original affiliate label distributor
has seen a new product from a publishing partner, refused it, and returned it
to the publisher to place it with another distributor, the publisher is obliged
to bring the product and the deal back to the original affiliate label distributor
when it has found a new distributor and settled on terms and conditions. At
that point, the original distributor can match the current offer and keep the
product on its list.
Publishers entering the multimedia
channels today must assume that perhaps only 60 percent to 70 percent of sales
will come from retail.
It is unwise for publishers to allow this condition, as it completely hinders
the ability to shop a product to other distributors if the current distributor
has refused it. This clause is rarely seen in national distribution contracts
for new media, but crops up in some affiliate label deals.
The returns/defectives fund.
Affiliate label distributors require that a fund be set aside for returns and
defective units. This amount, withheld from the publisher by the distributor,
is adjusted every six months. Last year, this kind of fund ranged from 10 percent
to 15 percent of the invoice amount received by the publisher from the distributor,
though negotiators usually settled at 10 percent. The percentages required by
these funds have increased in the past several months, as distributors seek
more safety from the failure of small publishing companies. Now, the reserve
fund is likely to be at least 15 percent, and in many cases 20 percent. Some
national distributors pay less attention to this clause, choosing instead to
balance carefully their inventory and accounts payable due from their publishers,
never allowing publishers to become overextended in their payables. This means
they may order every week or two, keeping their inventory very low, but increasing
the publishers' administrative and shipping costs.
Exclusivity.
The exclusivity clause in most distribution agreements locks the publisher into
the agreement for all products created during the term of the contract. Recently,
some publishers have created product lines for different genres of products,
releasing only a single product line to a distributor in order to match more
closely that distributor's skill set with the genre of product.
Evaluating distribution partners
A publisher building a significant infrastructure for marketing and sales needs
as much support from a distribution partner as possible. There are two key issues
to consider: sales reporting and the distributor's sales force.
Sales reporting.
One of the crucial negotiation points for a publisher hinges on the distributor's
ability to respond to the publisher's needs for sales reporting from the field.
Questions to ask include: What infrastructure is in place at the distributor
to create these reports? If the publisher has an immediate question, how quickly
will the distributor respond with an answer from the field? Does the distributor
merely track sales per SKU? Does the distributor track sales per SKU per retail
chain? Does the distributor report sales per SKU per chain per store location?
All these depths of reporting are available from retailers, but only if the
distributor has set up a tracking system and paid the retailers to generate
the reports. This investment in reporting is an important feature to look for
in a distributor. Publishers cannot control their destiny without such reporting.
Distributors will offer 30-day reports or quarterly reports. Quarterly reports
are not adequate. It is important to receive 30-day reports, and to understand
the depth of those reports.
Feet on the street.
The distributor's sales force, or "feet on the street," may be critical to a
publisher's success in retail distribution. How many salespeople does the distributor
have? How long have they been with the company? What is the turnover rate of
this sales force? What other product lines do they carry other than the distributor's?
How much clout does the distributor have with this sales force? Are the salespeople
exclusive to the distributor or are they employees? Which channels do they penetrate
(software, computer superstores, video, audio, bookstores, mass merchants, department
stores, supermarkets)? If the sales force is made up of contractors, the question
of how highly the they regard the distributor's product line is especially important.
Getting good help
A publisher should have resources to assist in business planning, distribution
strategy and negotiation, and the law. Some of these might be partners or outside
consultants, attorneys or agents. The publisher's business plan must include
a strong distribution strategy, and product planning that is detailed and tactical.
This plan will serve both as the publisher's guide, and to gain credibility
when looking for funding for titles or the company. Publishers should not expect
business planning or distribution consultants to be experts in the law. They
must have an excellent attorney or agent (or both) specializing in multimedia.
A good multimedia attorney will generally have experience in copyright law and
content licensing. Agents are most experienced in representing talent. Attorneys
are available from both the software and the entertainment industry, and agents
work strictly in the entertainment and book publishing arenas. Attorneys and
agents are most useful when negotiating the deals that result in a product,
or compensation of the talent that contributes to the product. Attorneys and
agents are not usually experienced either in business planning or in bringing
the product, when finished, into the distribution channels. They're not trained
in the vagaries of distribution. It is important to obtain assistance from consultants,
agents and attorneys when negotiating all levels of all contracts. In Hollywood,
artists are never allowed to negotiate their own contracts -- it is
left to the agent or manager to act as the "bad guy." It's always useful to
have representation when two partners are negotiating together against the other
team, as it allows more flexibility and can create opportunities to win the
negotiation.
The best defense is a good offense
Multimedia publishers are the players most at risk and with the most responsibility
and, therefore, should plan carefully. Several strategic and tactical approaches
can contribute to the publishers' success:
The distributor's sales force,
or "feet on the street," may be critical to a publisher's success in retail
distribution. How many salespeople does the distributor have? How long have
they been with the company? What is the turnover rate of this sales force? What
other product lines do they carry other than the distributor's?
Joey
Tamer refines the vision, strategy and success of companies --
Fortune 1000, capitalized start-ups and investment fund.
www.joeytamer.com
(310) 245 5310 joey @ joeytamer.com