In addition to co-chairing the Wharton Club of NY’s Media and Entertainment Network, Peter Hildick-Smith, WG’81, and his firm, Codex-Group, have been providing the market insight needed to guide publishers through publishing’s digital transformation. Peter shares his insights into publishing, and what he gained from Wharton.

What service does the Codex Group provide?

Book publishing is a consumer medium — just like movies, the Internet or music. When the consumer is your end customer, you best meet his or her expectations and needs if you take the time to understand their behavior, and how they respond to what you’re offering. Codex-Group is a consumer strategy firm that provides book publishers, tech companies and retailers with the audience research and digital insight needed to make the right business decisions in this very fast changing market.

In 2004, when I founded Codex, book publishing was the only major media industry with no audience information. The TV industry has a ton of tracking data on what programs people are watching, which celebrities they like, you name it. The movie industry looks at celebrity preference, ad testing, theater testing and demand forecasting. The Internet generates a tremendous amount of audience data every time a consumer visits a site, from user experience to purchase conversion rates. Codex was founded to fill that gap in the book market. We’ve now worked with every major U.S. publishing house and many of the leading book retailers.

What are some of the book industry’s key challenges?

Since 2009 book publishers have made digital distribution of books a priority. This has put the consumer book industry in direct competition with all other entertainment media for consumer attention. Once a consumer is on an iPad, they’re just one click away from updating their Facebook page, enjoying a film, reading breaking news or a book. With books no longer sheltered by their unique format and store distribution channel, both book publishers and booksellers have to be far better informed to win customers and survive in an industry that’s now changing virtually on a monthly basis.

New technology always appears to hold great promise for any industry that adopts it. But a digital transition has to be managed carefully to minimize the phenomenon of “analog dollars to digital pennies”. Simply put, digital distribution not only reduces cost to deliver it also opens up consumer access to a tremendous amount of very low price or free content. Books are the last media industry to digitize. Newly released bestsellers listing for $25 in hardcover are also available for $9.99 or less in eBook format, with millions of additional book titles also available for free digital download. The resulting loss of bookstores like Borders makes it far more challenging for publishers to launch, and for consumers to discover new books or new authors that don’t already have established brand names.

It sounds like you’re trying to influence an entire industry.

Digital publishing is a completely different business model than print publishing—our goal is to give publishers the information they need to successfully make that transition.

We’re trying to make sure book publishing benefits from the digital transition by answering questions about the key consumer and competitive behavior driving this extremely dynamic new market.

The film industry has done the best job of managing technology transition to protect their revenue base, but then they’ve also had the most experience, doing it since the 1950’s. When TV was created, the pundits said, “TV will be the death of the movie industry.” The movie studio execs instead developed a strategy (“windowing”) that allowed them to prosper in the face of the TV technology transformation, and in each following wave of new technology— from cable to VCR to DVD, from Netflix to RedBox to digital download and beyond. Each new technology format gets a later release date and a different price point consistent with the quality of the experience, so each new movie format adds to individual movies’ total sales.

Book publishers however, are betting their business on digital distribution. They release the ‘discount’ eBook format of a new book on the very same day they release the premium price hardcover format. This not only cannibalizes print revenue, it also has a bigger domino effect—bookstore traffic falls, fewer books reach stores, fewer new books and authors get discovered, and bookstores close. Our goal is to help book publishers answer the question— what will their new business model be in a digital market without bookstores? This new market will be dominated by Amazon’s 55% market share, where any author can self-publish digitally and even earn much higher royalty rates.

Based on our latest book consumer research, nearly 40% of book buyers are now reading digitally, and another 35% will make the switch as soon as eReader device prices drop below $80. We believe publishers’ new business model will look much more like that of an advertising agency, earning revenue based on their ability to get consumers to not only discover their new books, but to convert them to buying those books.

As a result Codex not only measures the brand equity and sales potential of individual author “brand” names, but also has a database of over 1,500 individual books and bestsellers that have been digitally tested to quantify the effectiveness of their message and design to convert book browsers to book buyers. By improving the browsing appeal and purchase conversion rate of book message, presentation, cover design, title and jacket copy before publication, publishers and authors can increase both book discovery and book sales in an all digital market.

What is a recent book you’ve done research on?

Much of our work for publishers is confidential. On one of our most recent bestseller projects the publisher and celebrity author couldn’t agree between two radically different versions of the book’s message and design. They asked Codex to secretly test both with book consumers to measure which approach would sell the most copies—without it leaking to the media. The winning approach not only landed the book at #1 on the New York Times bestseller list, it remains on the Top 10 Amazon bestseller list for all of 2011. Another example was the first book in Chris Reich’s new series, Rules of Deception. We tested 4 very different book positionings for Chris, and the winning approach landed at #3 on the New York Times list.

How did Wharton figure into your getting where you are today?

Wharton not only gave me a great marketing education, it also connected me with some great professors I’ve kept in touch with ever since. So when I had the idea for Codex, I knew the best place to go for start-up advice! Professors Dave Reibstein, Josh Eliashberg and Pete Fader all gave me great suggestions based on research work they’d done in related digital, music and film media, and helped validate the Codex idea. Wharton Ph.D. student, Jeff Larson GRW’06 (now a professor at Brigham Young University) also helped develop our statistical models. The Wharton connection was essential to Codex’s development as a business.

And you volunteer for the Club?

I’m the Marketing VP, and also co-chair the Media and Entertainment Network with Chuck Forgang, W’78. There are a lot more Wharton alumni in media than most people realize—the group has over 300 members from every media sector you can imagine, even Broadway performers and comedians! It’s a very fun, supportive, cool group of people, and senior media alumni like Mark Aronson W’81 (National Basketball Association), Salil Mehta WG’92 (NBC Universal), Matt Blank W’72 (Showtime), among others, have contributed great industry and career insights to members at our events.

Ironically, the only reason I first joined The Wharton Club of New York was to get discounted health insurance for this start-up—I had no idea I’d also meet many new friends, and get new business opportunities as well!