Xerox case analysis

TO: Ranjit Singh, Senior V.P., Internet and Software Solutions, and Frank Steenburgh, Senior V.P., General Manager, Graphic Arts.
DATE: March 3, 1999
SUBJECT: Business opportunities and implications of the Book-In-Time system.

BIT system is a breakthrough development and will represent an important revenue source for Xerox. Although we have the option of using BIT to expand our chain ofdocument technology centers to get into the book production business, I propose that we:
• Sell the Book-In-Time system equipment to all potential buyers in the value chain such as publishers, printers and retailers.
The Value, Benefits and Threats that BIT Creates in the Value Chain for Books
One of the major advantages provided by BIT systems is its ability to make certain processes in thevalue chain more cost-efficient. Cost per book is a function of print run size. The per-unit fixed cost for mass-market paperback publishers is low when the number of copies is large (more than 500,000 in the first run). The problem with this is that not all books need to be printed in such large quantities. Therefore, books with small-quantity needs will have to face high per-unit fixed costs. Forinstance, professional books, which are usually printed in small quantities, are required to pay the same upfront fixed composition and plant costs that would be required to print a general interest book for which a large amount of copies is needed. Table A shows typical upfront overhead costs for a typical 300-page book from an offset printing process:
TABLE A – Upfront costs for a typical300-page book
| Amount | Type of Upfront Cost |
|$1,000 |Minimum cost for 16-pages film ($50-$75 per sheet) |
|$1,500 |Conversion from film to plates for mounting on the printing rollers |
|$1,000 |Labor and machinerydepreciation costs |
|$3,500 |Total overhead cost for first book. |

In addition to these regular fixed costs, the cost of acquiring the paperback rights to a successful hardcover title or buying the right to an unreleased book could be in the millions of dollars which wasfine if the book was sold in high quantities. However, many times, publishers would have to face the reality of a book failure and would have to face the financial consequences related to this. Moreover, BIT systems will benefit each member of the value chain in very specific ways.
PUBLISHERS
The publishing industry is currently looking for alternative models of production and distribution due tothe inefficiencies being encountered within the current system. Table B shows how the profit margin for publishers is very limited due to an extensive list of high costs publishers have to face.
TABLE B - Cost Structure on a Typical 300-page $25 paperback book
| Percentage | Type of Cost |
|20%|Manufacturing costs (paper, printing and binding) |
|20% |Author royalties, rights and permissions |
|30% |Overhead including sales and marketing costs |
|25% |Costs of book returns|
|5% |Margin at best |

As a consequence of these costs, publishers have changed their focus from literary sensibility to more cutthroat and business-like behavior. Publishing houses have started to hire industry outsiders with modern management techniques who are more focused on eliminating costs...