"Of the making of books, there is no end, and much knowledge is a weariness to the flesh." Thus spake the preacher, several millennia ago and verily he did speak the truth.
In his time, when he was king in Jerusalem, they slaughtered a sheep, ate it and made books out of the cured skin. Since then, untold generations have gathered much knowledge about the making of books, among other things.
This has indeed caused vast weariness to the flesh and entire tropical forests have been chopped down for the sole purpose of feeding the publishing industry.
Yet, there could be an end to the making of books as we know them, if the publishing trade uses knowledge it already possesses.
Consider a book. The manufacturing starts with commissioning and digitising intellectual content (if one may use "intellectual content" so loosely as to include the babblings of Danielle Steel, Paulo Coelho, etc). Digitised content is then transferred onto a physical medium (called "paper"), and mass-distributed via complicated delivery networks.
The printing takes an enormous amount of time and printing costs and commission between add up to something like 50-80 per cent of the cover price. Publishers pay about 40 per cent of cover price as commissions to the distribution-retail chain. Publishing is as risky as oil exploration. Every fifth book has to be a "gusher" to absorb the overheads and losses on non-sellers.
Suppose you cut out the physical element? The publisher could release an e-book several months earlier than a print edition; charge 50 per cent of print cover-price; organise e-distribution with generous commissions; and still come out with bigger margins.
The odds in publishing would improve because losses on non-sellers would drop - there aren't such massive upfront costs. If somebody wanted a print edition, he could even order one, and it would be custom-printed.
The knowledge of how to do this exists. Publishers release e-books and use e-distribution. But e-books cost as much as print editions and they are released after the print edition.
Publishers are apparently terrified of cannibalising print sales - even though their numbers would improve if they did. And, they are slaves to their distribution system for fear of what would happen if e-delivery didn't take off. So they pay huge commissions and live with bad odds.
One hopes that market forces will lead to changes in the hidebound way this industry works - but "hidebound" is, after all, a word borrowed from publishing! We're well into the second decade of the Web and market forces haven't made that much of a difference (despite Amazon) to the distributor-controlled book industry.
Oddly enough, one of the most tech-savvy industries is locking into a similar pattern of distributor-control. Financial services aren't hidebound - it is among the most IT-driven and innovative of industries.
But there's no other explanation for what's happening in the mutual fund industry. Here's the deal. Between 1999 and April 2006, Indian funds raised over Rs 200,000 crore with close to 500 new schemes.
Just one of these was a close-ended fund, the rest were open-ended. New Fund Offer commissions rose to 5 per cent over this 7-year period. That was okay since NFO expenses could be amortised over five years up to a 6 per cent limit.
In April 2006, Sebi banned amortisation for open-end funds. Any open-end fund launched post-April must make an upfront deduction from the NAV or from the AMC's own resources. But closed-end funds can still amortise.
There hasn't been an open-end fund launched since April! Every single NFO has been closed-end. The only reason for this sudden switch in the AMC scheme-structure must be a desire to keep distributors happy. This is odd because financial services pioneered the concept of direct online distribution.
Will market forces and investor-preference take care of this and force a return to low-expense open-ended NFOs? Not if publishing is a valid example. The only hope is that market forces in financial services are aided by a watchdog, which may just take corrective action.
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