Yet one more mystery about the enigmatic book publishing industry

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I’m trying my best, but I can’t comprehend why book publishers should care what the gross revenue of a title distributed via eBook format is if the publisher and author still receive net revenues (after costs of goods sold) equal to or greater than what they receive for the hardback format. But, according to this article in the Wall Street Journal, there are book publishers who are pushing back on the notion of releasing an eBook version of a new book for a price any less than the retail price of the same book’s hardback version.

Rather than me argue against such logic, here’s a link to a column called “The Kindle — Igniting the Book Business” by Harvard Professors Bharat Anand and Peter Olson — yes that Peter Olson, the former chairman and CEO of Random House, the world’s largest trade book publisher.

According to Anand and Olson:

“Prices of e-books should be shaped by cost structures and customer demand rather than by comparison to traditional paper book pricing.”

Back to my question: Why should publishers care about the retail price of a book if they could increase their margins on each book sold at a lower price but delivered digitially? Here’s the math on that, again from Anand and Olson:

If we assume that the average retail price of a print book is $10, then the average wholesale price is $5 (the $5 difference represents the retailers’ costs for store rent and personnel, including a profit of, at most, only 50 cents for the retailer); the costs of paper, printing and binding are roughly $1, the author’s royalties (15 percent of retail price) $1.50, internal publishers’ costs (including marketing, sales, warehousing, inventory management and distribution) of approximately $2, on average, leaving a publisher’s margin of 50 cents.

About half of these costs vanish in the e-book world since the store rent and personnel that make up much of the $4.50 are unnecessary; $1 of paper, printing and binding are not be incurred; and an estimated 50 cents of publisher costs related to functions such as warehousing, inventory management, production management and distribution disappear.

In other words, if you follow Anand and Olson’s logic (as I do) the publisher’s bottomline is larger on a greatly discounted (from hardback) digital version of a book, even if the author’s royalty continues to be benchmarked to the full retail price of the hardback version.

Sure, there are those who lose out if a book is purchased in an eBook format, but it is not the publisher or author, rather, they are: Printers, binderies, shipping companies, book wholesalers, physical store retailers (both big box and independent).

If the publisher’s responsibility is to maximize the revenues to the author and to his or her company, it makes little sense to raise eBook pricing.

But I do agree, there can be exceptions: As Anand and Olson suggest, eBooks offer the opportunity to experiment with various pricing scenarios. For example, eBook distribution could provide publishers with the opportunity to sell books like music — in albums or collections. Or, perhaps, there could be dynamic pricing with additional premium content for a higher price or for pre-release access.

Just don’t blow it, publishers.

(Bonus enigma observation: The same Anand/Olson pricing argument could be applied to audio books. However, audio books distributed via physical media (price of Jon Meacham’s American Gospel via CD: $24.05) and audio books distributed digitally (the same book on audible.com: $23.07) are roughly the same price. In other words, book publishers have been able to discourage the expansion of the online distribution of audiobooks for years.)

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  • Great link.

  • AKW Books is a traditional publisher with a non-traditional product: eBooks.

    Your economic model is right on target! In addition, there are none of the dreaded “returns” that cost the paper publishers so much money.

    As a result, in addition to keeping costs and prices down, we’re also able to pay our authors GREATER royalties (both in percentage and actual dollars) than those who publish paper books.

    With eBooks, the customer, the author, and the publisher “win”. The downsides of eBooks are:

    -It’s hard to curl up with an eBook to read yourself to sleep.
    -When your battery dies, you’re done reading.
    -Readers are still expensive, but you CAN read them on your computer. This will improve when the market reaches the “tipping point” (around 10% penetration).
    -It’s easier for no talent “author wanna be’s” to publish poor quality “vanity” works (we don’t do that).

  • @Al Kalar – One person’s ‘vanity’ work is another person’s ‘indie masterpiece.’ (my point: I’m not a fan of the pejorative ‘vanity’)

  • Rex — I think you make an excellent point, there are savings, especially in eliminating returns by booksellers that Al mentioned. There are also new costs that many folks ignore because they think of digital publishing as “free.” Design is more important in an e-book than in paper books, because the document needs to conform to different screen geometries and display capabilities (color, greyscale, active, video, etc.) and, in order to provide the simplest features of comparable hypertext documents. The lack of investment in design (and editing) in e-books because they are an after-thought and “free” has resulted in lots of texts that, when compared to paper, are lacking. The most obvious shortcoming is the lack of ability to share a book by handing it to someone, but more important things are the lack of citability (locations in e-books are relative) and the failure of publishers to add hypertext links within the book, even to an index or TOC.

    I’d rather see experiments in heavier investment in the product than just savings as the catalyst of e-publishing efforts. Here is something I wrote about this very question today.

  • Thanks, Mitch. I appreciate your deep knowledge of this topic. However, I don’t believe you can equate the investment necessary to improve the design of an e-book text with the costs outlined by Anand & Olson. Again, I agree with you that design is critically important to the quality of a an e-book. I will say that, based solely on my personal experience with a Kindle for the past 18 months, that I’ve been pleased with the readability of books I’ve read on it. I especially appreciate the flexibility it gives me in increasing/decreasing the font size.

  • Rex, I’m not suggesting they are the same costs, just that the publishers shouldn’t be looking at this solely in terms of how cheaply they can get an electronic version out. Better copy and enhanced reading experience will make a positive difference in the marketplace.

    But, to make my point, let’s take a hardcover as an example….. The paper and printing costs of a $24.95 hardcover are somewhere between $4.60 and $6.00. Except for huge bestsellers, at least a third of the copies produced at that cost will be returned, so the real cost per book because it is in paper and distributed through physical channels is close to $9.50 (including shipping costs both ways). If I sell the books at a 45 percent discount, I’m making $13.72 per copy sold before any costs (incidentally, this is about what Amazon pays publishers for bestseller Kindle titles sold for $9.99). After accounting for returns and the cost of production, my top-line profit is roughly $4.22. I still haven’t paid my G&A, editors, author advances, or for marketing. I might spend less than $2,000 for marketing (there goes the profit from 500 copies sold) many of the titles on my frontlist.

    Publishers run a very slim margin, on the first 10,000 copies of that hardcover, they will lose money. Sanford S. Bernstein analysts estimate publishers earn only 26 cents per paper book sold and $2.15 per electronic copy sold. But that doesn’t mean they’d make money on the first 10,000 electronic copies of the same book because the cost structure is different. It’s only when both books make it past their first season and become backlist titles or, if all the stars align, become runaway bestsellers, that I make money. It’s the fact e-books can sit in an eternal backlist and be sold in dribs and drabs for years that make them truly economically magical.

    Now, if I chose instead to produce the book as available in electronic format with substantial enhancements (a fully hyperlinked index and TOC, as well as a style sheets for multiple formats and screen geometries, for example), it might take a designer and editor an additional $5,000 to $10,000 to produce the electronic book for the “major” electronic platforms.

    For argument’s sake, let’s say I did spend $10,000 on the electronic designs. Compared to the cost of the first 10,000 hardcover books, it looks cheap, but unless I have real clout as a publisher or a proven bestselling author I am still getting only about half the revenue for e-books sold on Amazon. If I sell in other venues and formats, I have to spend some of my own money on marketing to get attention that Amazon delivers simply by being listed in front of so many potential buyers. The typical publisher, then, will probably see top-line revenue close to the $2.15 per copy sold in “earnings” identified by Bernstein’s analysts.

    In the end, I only get a margin that after I market my book and the sales channel “dips their beaks” comparable to the physical book top-line, so if I reduce my list price from $24.95 to $9.99, I make less per copy sold before any other costs. Therein lies the reason that open formats, self- and on-demand-publishing, and competing channels are critical to the evolution of publishing, because the price of selling digital stuff remains prohibitively high despite all the prevailing thinking that it is “free.”

    In electronic copies, there are no returns. There probably ought to be, since a lot of books and magazines ship for Kindle with egregiously bad unproofed copy (why The Atlantic, which I wrote about today, would not proof its Kindle edition, is beyond me). I get to keep more of my top-line profit as an electronic publisher, but it will still take sales of several tens of thousands of copies to break even on an e-book, particularly if I’ve paid an advance to the writer.

    This all supposes there is a reason for the publisher to participate in the process, that there is a good reason for authors to work with editors and marketers. That’s a separate debate, one publishers need to recognize no one takes for granted anymore.

    You’ll have to forgive me for cross-posting this to my new blog, BooksAhead.com. I just started it a few weeks ago and am looking for link and reader love. Thanks, again, Rex, for the very smart posting that started this. — Mitch

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  • Another interesting, and probably very apt analogy to this comes from The Long Tail (Chris Anderson) regarding the early days of sales and rentals of movies on vhs:

    “Recall the early attempts to sell movies at retail for $70-$80…”

  • Another interesting, and probably very apt analogy to this comes from The Long Tail (Chris Anderson) regarding the early days of sales and rentals of movies on vhs:

    “Recall the early attempts to sell movies at retail for $70-$80…”