Tilting at Windmills #283 – Marvel’s move to PRH changes everything

By Brian Hibbs

Penguin_Random_House_logoWow, so this has been a pretty weird year, no? Starting with COVID-19 shutting down most of America, then Diamond stopped the flow of new product for about two months, and, as a response, DC pulled out of the Diamond system in favor of new and untested “distributors” (actually, just other comic stores), and in the middle there I personally had two store anniversaries during full- or partial-shut down conditions, a massive heart attack, and just last month my wife got her heel crushed in a car accident. So, to say I wasn’t exactly prepared for last week’s announcement that Marvel was also pulling out of Diamond – this time for Penguin Random House – is, perhaps an understatement?

This, as they say, changes everything.

caption.jpgIt’s such a big topic, it’s almost hard to know just where to start, because this decision is going to impact every corner of making comics whether you realize it or not. Some things now, some things in a year, and some things in a decade. But be certain that this is perhaps the most seismic thing to ever hit comics because of all of the downstream implications.

Before I really start getting into it, let me be clear that I don’t actually have any “insider” information here – I certainly don’t have access to Diamond’s financial records or Marvel’s or my fellow stores. But I’ve been observing the industry and asking questions for the better part of four decades to have a reasonably high level of confidence in what I expect the results to be – but I sure as heck could be wrong about who is going to zig and how another is going to zag!

taw-46-1.pngLet’s start at 10,000 feet. About two years ago a Diamond employee accidentally sent out a file with a bunch of hard details about Marvel’s volume through Diamond. As I wrote then, “While certainly Diamond must have accounts that don’t buy comics from them, as well as accounts that don’t buy Marvel comics, we can certainly now say that there are 2,440 accounts buying Marvel comics during this seven month period, and if the listing of “store count” column is accurate (there’s reasons to think that it might only have a tangential relationship to reality – including “reorder accounts” or counting non-retail warehouse spaces as a store), then there are 3,112 “stores” in the world. Of this, the United States has 2,061 accounts (2,508 stores), while the rest of the world has 379 accounts (604 stores – there’s a lot of sub-distribution outside US proper). One thing these numbers do not appear to include is anything related to Diamond UK, so there are an unknown number of additional accounts and stores than are listed here, accounting for a probably significant number of sales.”

Now certainly a number of stores closed during COVID, but it appears to actually be a very small number at the end of the day, and at least a couple of stores have opened since this file was generated, so I think we’re very OK believing that there are still very roughly 2500 accounts who would want to buy Marvel comics, in the US alone.

Bear in mind that the American Bookseller’s Association says that there are about 2400 Independent Book Stores in the US, this means the number of stores dedicated to comics – what we call the Direct Market (or DM) – is as large, if not larger, of an installed base.

Penguin Random House (which I am going to call PRH from here out) is the single largest seller of books in the US, representing 24% of the US book market in 2019 – and (as you can follow from that link) they’re trying to buy Simon & Schuster (S&S) who represent an additional 9% of sales. Traditionally DM stores buy nearly 100% of their comics product from Diamond, and these sales are wholly separate from normal Book Market calculations. In 2019, sales of comics in comic stores was roughly $525 million. Sales in all bookstores (not just indie bookstores) including through Amazon, were roughly $570 million)

avengers-13-p1-orig.jpeg

One of the open questions over the last decade is “Well, but how much of the dollar volume of DM stores is staying within Diamond?” I, for one, have been aggressively re-sourcing many of my goods away from Diamond and into the “book” channels for multiple years now. Why? Because on book-format product, Diamond is not a very competitive supplier: they charge shipping on all product sent, while standard terms in the booksellers world are freight free at extremely modest order sizes (PRH ships freight free for just $200 in re-orders!), and Diamond adds a regressive 3% “reorder fee” on all restocks. But, up until now, they’ve been effectively the sole and single source of periodicals.

How Diamond does business can be a little confusing if you’re not super tuned in, so let me try to run it down. In the Old World, Diamond was the “sales agent” for DC and Marvel comics – Diamond didn’t own the books, nor set the Terms of Sale, they were “just” the getting-to-market mechanism in terms of creating catalogs, and fulfilling and shipping orders, but Marvel and DC actually were the supplier of record. Discounts were given to retailers on a sliding scale (unique for both of those pubs) ranging between 35-59% (DC capped at 57%). Those massive discounts, along with the nature of the DM as (very, very generally) a superhero clubhouse-oriented market, resulted in DC and Marvel being roughly 70-80% of their sales of comics product. This is very different than in the book world, where Marvel and DC are more like 15% of graphic novel sales through bookstores.

Then Diamond has distribution deals with many vendors – at the least the “Premier” publishers at the front of the book including Image, Dark Horse, IDW, Boom! and Dynamite – but this tranche was typically more like a traditional distribution set up, where the ruling Terms of Sales were Diamond’s, not the publisher’s. These vendors combined were still only roughly 15-18% of Diamond’s comics sales. The only non-premier vendor that cracked 1% at Diamond in a typical month was Viz.

taw-46-3.pngIt is important to note that the “Premier” vendors represented ~90% of Diamond’s comics sales combined, and that these vendors were paying the 3% “reorder fee” so the retailer didn’t (this is why most retailers aren’t even aware there was a “reorder fee”). It is my understanding that these publishers’ books are not owned by Diamond, and that Diamond, in fact, charges regular warehousing fees for backstock. But, in theory, if an item is in-print from these folks, it is in stock at Diamond.

Now, this applies primarily to periodical comics, and for Direct Market stores, only – most publishers were set up with bookstore distribution elsewhere. DC, Dark Horse and IDW are all at PRH for bookstore sales, Marvel is at Hachette, and Boom! is at Simon & Schuster. Diamond also has a bookstore distribution business (Diamond Book Distributors), and Image and Dynamite are solely distributed that way.

For (virtually, I’m not privy to exact contract details!) every other vendor, Diamond is a “wholesaler”, where Diamond is buying and selling vendor’s goods at their own risk. The DM has a solid enough preordering system and mentality that says risk is extremely low, and it’s even more mitigated by that damn 3% “reorder fee” – and the to-retailer discount for many after that caps at 45%. Individual periodicals and books from these publishers are only stocked if Diamond thinks they have commercial prospects (so: rarely).

What IS a “Direct Market” retailer, by the way? For all practical purposes these are self-defining terms. There’s no term sheet describing the difference between a “book” store and a “comics” store, and I have radical doubts one could even find a common description that worked in a universal fashion. In practice Diamond was never particularly discriminating (in fact it is crystal clear that a meaningful percentage of “stores” on that Marvel leaked doc were actually people without storefronts or buying clubs, both of which are expressly against Diamond’s Terms of Sale) – so certainly a “bookstore” could have a Diamond account. Just a few did – mostly because most of them appear to value returnability over margin – I would love to debate someone from book retail about this difference, someday!

But how many DM stores were sourcing graphic novels outside of Diamond? Sort of a big open question. Starting in 2018, I switched the majority of my book purchases to “Anyone But Diamond” (we’d been buying “small press” from Cold Cut or B&T for, gosh, some 20 years before that!) just from economics – not having to pay shipping virtually always offset the difference in discount. I was seeing shipping run at about 6% of invoices when I was buying graphic novels primarily from Diamond! I imagine a meaningful number of stores quietly shifted business over the years, and Diamond “never noticed”!

Here’s the thing: Diamond makes a lot of profit from charging for shipping, from charging (someone) that “reorder fee”, and, oh yeah, from debt-servicing. Lots of folks have been into Diamond for lots and lots of money over the years, and Diamond has always operated as the “bank” of the industry, keeping storefronts afloat, as well as helping publishers float print runs in some cases. I think it’s at least possible that a significant percentage of Diamond’s profit doesn’t come from the actual distribution of goods, but from their panoply of fees and services charges.

There have been many, many, many efforts to get Diamond to change things over the years. I personally have spent at least twenty years trying to encourage company VPs to modernize their shipping and discount structures. The clear advantage that Diamond has over other distro options is that comics and comic shops are in their DNA, and they had the best chance to “find the next Bone”, or to encourage the next rising publisher, and to ultimately make comics a better place. But sadly, it was like they liked being in a little box that mostly marked for DC & Marvel, and they understood being in their little box, and they didn’t seem to me to actually want to get outside of that little box.

That they never rose to these challenges will always be, I think, their greatest failing, because they were given enormous amounts of warnings from many many participants. But it was all gravy until suddenly one day it was not.

As for the math of comics: there are essentially what I would consider to be two overall “models” that work. One is the bookstore model of having a patron who gives you an upfront advance on royalties so you can produce work straight-to-book hopefully to make it up on the backend (Kickstarter, et al, also largely works on this same theory, just not with a traditional “publisher”). And then there is the DM model where you serialize the work, paying for it as it’s made, so that the final collection(s) of that work is all pure gravy (this would also be, very roughly, how Manga works too).

I am very much in the DM camp on this (shock!). The advance-on-royalties for most cartoonists is preposterously low for the creation of a 200 page labor-intensive manuscript. From what I know of advances for a large swath of creators (especially young and starting out ones), it tends to work out to payments not much better than (federal) minimum wage. And while royalties can pay out, especially for authors at the top of the pyramid (and boy do they, if you’re on the top!), I would say the overwhelming majority of books never actually pay out for the work involved. The serialization of comics at least makes it possible that creators can make a living wage… or even a middle class one (!) during the process of creation itself, because of page rates. It’s also the thing that supports the existence of a class of stores actually focused on the single media – serialization breeds regular customers who become much more engaged with comics. It is also simply easier to convince a customer to take a flier on a $3-4 object than a $20 one.

That’s the 10,000 feet view of comics, at least as I see it.

*****

Next, we need to look into the weeds and try to see what the downstream impact of Marvel’s move are likely to be.

So, much like Heidi, I definitely think that (at least part of) this bodes well for comics in that a huge company in the book world is making a reasonably major investment in periodical comics because they think they can make a profit in doing so. That’s a good sign for the “legitimacy” of periodical comics, overall.

taw-46-4.pngBut where she and I might differ is in assumptions about just how willing to support the whole market is PRH looking to go. And strictly from a business-case perspective just seven publishers represent ~90% of extant DM sales, so it’s likely that that is where the attention is going to go. Those pubs are, in rough Market Share order: Marvel, DC, Image, IDW, Boom!, Dynamite and Dark Horse.

Before I say anything else, I think that PRH is an extremely professional operation. I have zero doubt that they will be able to accomplish the distribution of periodicals in an efficient fashion because they’re really good at their jobs. I have no concerns about them filling demand, about accurately packing and billing, about dealing with damages or shortages, etc – they’ve been a smooth, smooth distribution partner for my stores, and I very much enjoy working with them. It’s likely there will be a learning curve, but I think they’ll conquer it pretty fast.

However, periodical comics are extremely high-touch to distribute, and relatively low-ROI (Return-on-Investment) as a result. They are “fragile” and there are very very high customer expectations about how the product arrives, relative to the distribution of books. Most graphic novels that we receive from PRH do not arrive in anything approaching “mint” condition, and they’re setting up an entirely new process, warehouse and workflow to handle the comics, which hopefully will yield comics arriving in good shape – but these things cost time and margin.

I am also not especially sure how much PRH understands just how many micro-circulation individual SKUs they might be looking at. Before the pandemic, Marvel didn’t really have many individual periodicals selling over 60k copies. And that means that the common variants that Marvel seemingly has as its main business model are yielding a lot of SKUs selling under 5k copies each. That’s like 2 copies per store, if that. They, for sure, have SKUs (such as 1:25 or 1:50 covers) that are very likely to have sub-1k circulations – and these are the items retailers will be most fussy about, too. Virtually none of these items retail for more than $5, so we’re probably looking at twenty-five-cents-ish of income for each SKU for PRH, for a lot of fussy hassle?

It’d be super swell if PRH was looking to become a “take all comers” distributor for periodical comics, but I have a very difficult time envisioning anyone looking at the numbers from the outside and thinking that made any sense, rather than just “skimming off the cream”.

My expectation is that, given the Marvel deal starts on 10/1, that PRH is going to take all of Q4 to make sure this is working the way they think it’s going to work, and that they’ll probably wait to add some more publishers until Q1: after 1/1/2022. I would further expect that this would first extend to vendors they already have relationships with, which means for periodicals, probably in order DC, Dark Horse, IDW, and possibly Archie and Titan. (PRH also distros Kodansha, Nobrow, and Vertical, among others – but none of those are really in the periodical business)

I have been told that many of the “premier” publishers are not actually signed with a current contract, and are still working off of the last contract while they negotiate the next one, so it’s very possible that sudden changes could come quickly, as folks appear less contractually limited as perhaps we think. I would imagine that PRH is very eager to get Image’s business (as Image has regular bookstore distro through Diamond Book Distributors, and they are the #3 DM publisher), and I would kind of assume that if the Simon & Schuster deal goes through, then S&S clients (Ahoy, Boom!, Humanoids, Oni, Red5, Scout, Source Point, and Vault all are in the periodical biz, Viz and Z2 pretty much are not – and there are others) could all come on board). But I also think that S&S/PRH merger is a federal anti-trust nightmare… especially for comics, because if you add Viz to the DM business, that’s a huge percentage of the total pie concentrated solely in a single pair of hands.

taw-46-5.pngBy this time next year, I’d expect that we’ll know how far PRH is going to go in terms of smaller publishers – but I wouldn’t expect to see a lot of deals for the teensiest folks, or for self-publishers, just based on raw math.

I absolutely expect that DC will add PRH as soon as they humanly can – why wouldn’t they? They are already using PRH in the book industry, and PRH is actually up to the job. I think the experiment with turning their #1 & #2 retail accounts into “distributors” has been a pretty mixed bag (and one of those two dropped out of their own volition!) and virtually every retailer I know wants to stop giving even a penny to their largest retail competitor.

So I think that any store of any meaningful volume whatsoever is going to run to the arms of PRH for 50% off/Free Freight on all shipments. This is not a thing that a markedly smaller Diamond could offer – even if somehow they managed to match the discount (and it’s extremely unlikely it is going to be possible, except as a loss leader, and even that for a very short time), that 4-10% savings on freight is genuinely game-changing. It drove me into the arms of PRH and the other bookstore distros for book format material years ago, as well as almost all of my peers that do meaningful volume in book sales. Now that calculation is going to be obvious to every single retailer.

PRH’s terms actually also make it so that the smallest accounts do the absolute best. There were nearly 400 accounts receiving 35% on Marvel from Diamond. If they can pass the credit check, that’s going to be a 15% increase in raw discount, plus the free shipping on top of that for those stores – that’s fantastic, and you’d have to be a crazy lunatic to stick with Diamond for Marvel after that – and it gives you every incentive to try and actually grow your Marvel sales, at the expense of DC sales via Lunar.

Even for the larger accounts, many of them are going to be at least matching their current terms at Diamond once you adjust for the shipping. It’s really only the biggest of the big who might find themselves in a bad place, but maybe Midtown and DCBS and the handful of others in that space will qualify to be “wholesale” accounts, at the same level as Diamond?

Speaking of DCBS, at the moment they are the “distributor” for DC comics via Lunar Distribution. As far as I have read the reporting, it doesn’t sound like Lunar is an “exclusive” distributor for DC periodicals. I would therefore expect DC to try to allow PRH to also distribute their comics as soon as possible (I believe Q1 ’22). While I don’t think they’re going to stop Lunar from still distributing, as soon as there’s a second viable option I imagine most retailers are going to do whatever is cheapest and easiest which seems likely to make Lunar the One-to-Drop for most accounts. But who knows, maybe they add Marvel to their wholesale and somehow figure out a way to compete. Stranger things have happened, but I find the math to make that work pretty tricksy, and it means Lunar is pitted against a true multi-national corporation, which makes me assume they have little chance to succeed.

And then either way you cut it, it’s hard to not think that Diamond is now is full-on existential peril. How can you possibly lose 75%+ of your volume (Marvel and DC) in a single year, and hope to carry on? Especially when your next five largest vendors are almost certainly going to be actively looking for the fastest escape hatch that they can find.

Here’s the thing that any sensible retailer who will now be ordering comics from PRH is going to realize: PRH is a super-professional organization that is structured in a way that will get the product to you cheaper than Diamond. And once folks get a taste of that, they’re then going to move business in trade paperbacks from IDW, Dark Horse, Archie, Titan, Kodansha because you’re already ordering your Marvel and DC TPs from them – even if all of those publishers don’t change a single thing about their relationship with Diamond, it is absolutely completely inevitable that Diamond will no longer be the supplier-of-choice of those GNs for many retailers: PRH is cheaper.

taw-46-6.pngBut this is the crux of my fear: Diamond, on the face of it, would not seem to be able to pivot to a more modern GN distribution business structure now that they’ve lost the majority of their volume, and the reasons that most DM retailers had to deal with them. They could have, once – but now it’s probably too late. While Steve and his team are smart, and conceptually Steve has resources that could be liquidated to keep things going for a while, it is very hard for me to see where the payout can possibly be. We know what happens to a distributor who loses both Marvel and DC’s business, and have Image comics as their largest exclusive vendor – this exact scenario already put Capital City out of business in 1996!

If Diamond goes, what happens to almost every smaller publisher? Diamond had faults, oh it had many faults and more, but they took a lot of chances on a lot of people over the year and built a system that made it possible for new voices to reach a national network of stores and readers in a pretty damn hyper-efficient manner of targeted solicitation. Absolutely with Kickstarter or Patreon or whatever, creators don’t have to go through Diamond any more, and sure, “comics will survive”, but these things are all massively less efficient without a strong centralized system that “took all comers” and actually gave them all a pretty equal shot.

At the end of the day, I don’t think it is possible to run a truly national full-service distributor for periodicals without either Marvel or DC, because I don’t think the volume and velocity of what remains in and of itself is enough to keep the lights on at the minimum level of pricing and service that PRH is going to be the new standard to service.

And, so ultimately my biggest fear is that the vanguard of independence for making comics, the ability of a Teenage Mutant Ninja Turtles or a Bone or even a Walking Dead to rise up “out of nowhere” and to build that periodical behemoth which then allows indy creators to leverage the book format, is about to be severely tested, and perhaps entirely lost. And while people will find a way to make comics –of course they will –the likeliest result is going to be that comics will start to pay a lot less for creators as a general class, and comics will get “safer” and less experimental as even more corporate control is consolidated. I’d rather that Eastman & Laird or Jeff Smith or Robert Kirkman & co are the ones who get to reap the rewards  nstead of giant multi-national corporations – and this has always been the greatest promise as well as the greatest gift of the Direct Market.

The ironic thing to me is that many pundits are all “Hooray! A monopoly is dead!”, not recognizing that what it will almost certainly lead to… a bigger monopoly, with even higher gates to get over. What they never understood is just how much Diamond allowed work to come on to market – of course, Diamond barely understood that either, which is where the tragedy at the heart of this farce is.

Don’t get me wrong, PRH is going to be a great partner for Marvel, and for all of the DM stores that haven’t yet done business with them. The largest bulk of stores are going to end up doing better on the lines that PRH distributes – though clearly there is a meaningful percentage who are absolutely going to come out significantly worse – but it’s all but certain that we’re going to have multiple major and minor players who will be irrevocably harmed by this, and we’ll be dealing with the fallout of these for a decade to come or more.

I wish us all well.

**************************

Brian Hibbs has owned and operated Comix Experience in San Francisco since 1989, was a founding member of the Board of Directors of ComicsPRO, has sat on the Board of the Comic Book Legal Defense Fund, and has been an Eisner Award judge. Feel free to e-mail him with any comments. You can purchase two collections of the first Tilting at Windmills (originally serialized in Comics Retailer magazine) published by IDW Publishing, as well as find an archive of pre-CBR installments right here. Brian is also available to consult for your publishing or retailing program.

 

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Retailer Brian Hibbs on what the Marvel?PRH move means…a lot.
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