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Michael Gracie

eBooks provide benefit across the publishing value chain

It’s out of print, a familiar moniker for those seeking titles long since published, particularly when the author put their best foot forward on the first attempt and nobody has been able to match it since. The publisher has a choice to make: do a small run and risk sitting on 999 copies, or forgo the cost along with the potential revenue. In either scenario, the author has little to gain. Meanwhile, by the time the house has distributed the second printing, the original purchaser has already made their decision – picking up a used copy in the secondary marketplace.

They could have bought the eBook.

Authors are fretting that the pricing strategies employed with eBooks are putting the pinch on their ability to make a living. What was once a $75,000 advance has turned into a $15,000 upfront slug, and some are now questioning whether their creativity must now be supplemented by a W2 plus dental insurance. The price gap between the tangible and intangible delivery is supposedly the cause, but in economic terms the responsibility for success is being spread further across participants in the system.

Dollars and sensee-books

Based on Wall Street Journal estimates, a large publishing house takes 50% of the retail price of a debut literary fiction. After paying the author their cut, the publisher still has to cover costs for editing, design, marketing, and the printing itself.

Under the eBook scenario, the price drops by 54%, but the publisher and author are now taking a bigger piece of the pie. The publisher’s share is down five dollars per book, but printing costs are no longer in the picture. We’ll assume that other publication costs fall too, but it’s likely the lion’s share of it was absorbed during the first printing. The publisher and author reap more of the rewards, but all players must work harder for success. At the writing level, selling 10,000 print editions is roughly equivalent to 18,500 eBooks1, as far as feeding the family goes. The retailer’s gross margin, however, is cut in half2, so you have to think they (i.e. Amazon) are in it for the volume.

Moving to small publishers, the outlook changes. Retail prices are lower across the board, but smaller print runs means higher distribution costs, hence a smaller percentage for the publisher and author. Call that a cost for being discovered, particularly where access to major publishing firms doesn’t exist. When you move to eBooks, however, you are now dealing with an organization bearing less overhead – it stands to reason more of the retail price of the book could be passed on to authors. If you (again) assume that editing, layout, and other fixed costs of production are absorbed during a first printing, it’s a slam dunk – with 20% of the retail price going to authors, 10,000 now equates to only 12,500 in digital form3.

Consumer Y

Convenience is the first factor contributing to the feasibility of increasing sales through eBooks. Reading devices have made it easy to carry around entire libraries, and the platforms built around those devices, at least in the case of Amazon’s Kindle and Apple’s iBooks, mean extreme ease in purchasing. No longer do you have to call the store for availability, then drive down to pick the title up. Or, wait 3 to 7 days for the postal service to lose it. Just search, click, and buy, then start reading seconds later. You don’t need the device either – I just bought the Kindle edition of an out-of-print book and read it on my laptop.

As Evan Schnittman notes, the growing investment in readers makes eBook version availability a must:

Ebooks aren’t a better value, ebooks aren’t more attractive nor are they a threat to the print version of any immersive reading book. This isn’t the same as paperback versions vs hardcover – where the platform and convenience are the same – the timing and pricing are the key ingredients. Books that aren’t in ebook form are do not exist to ebook reading consumers. There is no cannibalization if in the mind of the buyer if there is no version available to them.

I’ll agree, and then some. As long as an eBook version is available, I’ll take it over the recently released dead tree version too. And when my library of eBooks is big enough to justify it, maybe I’ll buy a dedicated reader.

The missing link

What’s outlined above is conjecture, speculation, and some number tumbling even this accountant shrugs his shoulders at. There’s a missing link in the proposition though, one more difficult to quantify and often left out for the same reason. It is the secondary market for printed books.

Every day someone walks into a used book store and makes a purchase. Between the time that customer enters that corner shop and leaves with their pre-read find, thousands of similar transactions are completed on the likes of eBay/Half.com, Amazon and other online venues. On conservative estimate, if only 5% of one year’s primary book sales wound up in the secondary market annually, that is 70 million books a year4 being resold.

And for which publishers and authors receive not a dime.

Turn aggressive, and the lost revenue could make Clive Barker queasy. Assuming a book has a useful life of just five years, you’ve got potentially seven billion books in circulation that are capable of being resold. Take that same 5% (the rest are burned by the government), and you now have 350 million exchanges5 that exclude the creators. Using the average cut for the two publisher types portrayed above, we arrive at $11.38 – if they can hold onto just 30% of that after covering expenses, we’re talking $3.40 per book6. About the same goes for authors. They have just left several billion dollars7 sitting on someone else’s dining room table.

To the contrary, you can’t resell an eBook (at least not yet) – digital rights management makes it so, and the entire publishing value chain should consider DRM its friend. As long as the demand for the title remains, authors keep getting a few bucks in their pockets. Instead of looking at the reduction in advances as opportunity lost, authors should be viewing eBooks as a longer term opportunity, an annuity.

Someone’s gotta lose

If you are pointing at the end user, the answer is not really. I’ve seen many arguments against DRM, mostly weaved around consumer rights. I believe some of the debates have merit, and others don’t. The eBook market is one of the latter.

As previously noted, many consumers are willingly purchasing dedicated reading devices and then filling them with books. They see the value of the initial investment – its extraordinary convenience – and likely realize the payback period can be easily calculated based on the price differential between the print and digital formats. If they do a lot of reading, they break even very fast. On the flip side, you have this blog post writer buying eBooks he can’t get anywhere else, bent on accumulating before making the reader purchase. Either way, it’s a voluntary decision.

If you were forced to buy the digital version with its obvious trade restrictions over the print edition, it would still make economic sense. Assuming you only read the title once and found absolutely zero use for it thereafter, you are still better off buying the eBook, generally priced at less than half the retail print edition because you would be lucky to get 30-40% of that retail price in the secondary market anyway.

The only reservation this eBook user has? Platform dependency. You have to put a certain amount of trust in the developer – that they will be around to keep that platform running and/or have the motivation to do so. Your library could otherwise become your legacy, the key to the door lost forever. Until some fine hacker sets it free, like they always do.

Shut up already

eBooks aren’t cannibalization, or eventual annihilation, of the printed word. They are Gutenberg redux, technology flattening the cash flow stream for participants across the publishing value chain. Compensation, once fraught with uncertainty, will in short order become highly predictable. And like happened with the printing press before it, consumers of those digital words stand to benefit, with a burgeoning supply of content, accessible on demand from anywhere and everywhere.

Welcome to the strange new order, where everything recent is cheaper, and everything old is free.

MG signing off (to read another eBook)

Notes:

1) 10,000 * $4.20 ≈ 18,500 * $2.27
2) ($28.00 – $14.00) * 10,000 = $140,000; ($12.99 – $9.09) * 18,500 = $72,150
3) 10,000 * $2.50 ≈ 12,500 * $2.00
4) 1.4 billion units per year per WSJ * 5% = 70 million
5) 1.4 billion units * 5 years * 5% = 350 million
6) ($14.00 + $8.75)/2 = $11.375; $11.375 * 30% = $3.4125; ($4.20 + $2.50)/2 = $3.35
7) ($3.40 + $3.35) * 350 million = $2,362,500,000

Sources – WSJ; private discussions with small publishers

Comments

Just got the Kindle version of the classic, “Carp on the Fly” for $9.99.

Print versions started at $45.00….for a paperback w/170 pgs?!?

Tosh says:

Hammer: somewhere a carp is crying, while Jeff Bezos is smiling…

And I’m somewhere in between…

@Zilla – I did the same, only I get to make Reynolds buy me beers for it.

@Tosh – Tears of joy, or tears of pain? You never know with the Smithzilla on the loose.

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Kindle Fan says:

I think the whole book publishing system will be completely different in 5-10 years time (music too). We just don’t know what it’s going to be like – perhaps driven by social networking? Hopefully authors (and musicians) will get a better deal out of it.

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