[LINK] e-book prices

[stephen at melbpc.org.au]

Math of Publishing Meets the E-Book 

By MOTOKO RICH, New York Times, Published: February 28, 2010
<http://www.nytimes.com/2010/03/01/business/media/01ebooks.html?th&emc=th>

 
In the emerging world of e-books, many consumers assume that it is only 
logical publishers are saving vast amounts by not having to print or 
distribute paper books, leaving room to pass along those savings to their 
customers. 

Publishers largely agree, which is why in negotiations with Apple, five 
of the six largest publishers of trade books have said they would price 
most digital editions of new fiction and nonfiction books from $12.99 to 
$14.99 on the forthcoming iPad tablet — significantly lower than the 
average $26 price for a hardcover book.

But publishers also say consumers exaggerate the savings and have 
developed unrealistic expectations about how low the prices of e-books 
can go. 

Yes, they say, printing costs may vanish, but a raft of expenses that 
apply to all books, like overhead, marketing and royalties, are still in 
effect.

All of which raises the question: Just how much does it actually cost to 
produce a printed book versus a digital one? 

Publishers differ on how they account for various costs, but a composite, 
and necessarily simplified, picture might look like this, according to 
interviews with executives at several major houses:

On a typical hardcover, the publisher sets a suggested retail price.
Let’s say it is $26. The bookseller will generally pay the publisher $13.
Out of that gross revenue, the publisher pays about $3.25 to print, store 
and ship the book, including unsold copies returned to the publisher by 
booksellers. 

For cover design, typesetting and copy-editing, the publisher pays about 
80 cents. Marketing costs average around $1 but may go higher or lower 
depending on the title. Most of these costs will deline on a per-unit 
basis as a book sells more copies.

Let’s not forget the author, who is generally paid a 15 percent royalty 
on the hardcover price, which on a $26 book works out to $3.90. For big 
best-selling authors — and even occasionally first-time writers whose 
publishers have taken a risk — the author’s advance may be so large that 
the author effectively gets a higher slice of the gross revenue. 
Publishers generally assume they will write off a portion of many 
authors’ advances because they are not earned back in sales.

Without accounting for such write-offs, the publisher is left with $4.05, 
out of which it must pay overhead for editors, cover art designers, 
office space and electricity before taking a profit. 


Now let’s look at an e-book. Under the agreements with Apple, the 
publishers will set the consumer price and the retailer will act as an 
agent, earning a 30 percent commission on each sale. So on a $12.99 e-
book, the publisher takes in $9.09. Out of that gross revenue, the 
publisher pays about 50 cents to convert the text to a digital file, 
typeset it in digital form and copy-edit it. Marketing is about 78 cents. 

The author’s royalty — a subject of fierce debate between literary agents 
and publishing executives — is calculated among some of the large trade 
publishers as 25 percent of the gross revenue, while others are 
calculating it off the consumer price. So on a $12.99 e-book, the royalty 
could be anywhere from $2.27 to $3.25.

All that leaves the publisher with something ranging from $4.56 to $5.54, 
before paying overhead costs or writing off unearned advances. 

At a glance, it appears the e-book is more profitable. But publishers 
point out that e-books still represent a small sliver of total sales, 
from 3 to 5 percent. If e-book sales start to replace some hardcover 
sales, the publishers say, they will still have many of the fixed costs 
associated with print editions, like warehouse space, but they will be 
spread among fewer print copies. 

Moreover, in the current print model, publishers can recoup many of their 
costs, and start to make higher profits, on paperback editions. If 
publishers start a new e-book’s life at a price similar to that of a 
paperback book, and reduce the price later, it may be more difficult to 
cover costs and support new authors.

Another reason publishers want to avoid lower e-book prices is that print 
booksellers like Barnes & Noble, Borders and independents across the 
country would be unable to compete. 

As more consumers buy electronic readers and become comfortable with 
reading digitally, if the e-books are priced much lower than the print 
editions, no one but the aficionados and collectors will want to buy 
paper books.

(Page 2 of 2)

“If you want bookstores to stay alive, then you want to slow down this 
movement to e-books,” said Mike Shatzkin, chief executive of the Idea 
Logical Company, a consultant to publishers. 

“The simplest way to slow down e-books is not to make them too cheap.” 

In many ways, the $12.99-$14.99 price bracket for e-books is an 
experiment. With it, the publishers seem to have beaten back, for the 
moment, the $9.99 price that Amazon has offered for Kindle versions of 
most new releases and best sellers, but it remains to be seen whether 
consumers will tolerate that. 

Music prices, for example, have come under significant pressure in the 
digital age: from 2000 to 2009, the price of audio discs, tapes and other 
media, which includes digitized music, fell a little more than 3 percent, 
according to the federal Consumer Price Index. Prices of so-called 
recreational books, meanwhile, have increased just over 6 percent during 
that same period.

Certainly, publishers argue that it would be difficult to sustain a 
vibrant business on much lower prices. Margins would be squeezed, and it 
would become more difficult to nurture new authors. “Most of the time 
these people are probably not going to make huge sums of money the first 
time they publish,” said Carolyn Reidy, chief executive of Simon & 
Schuster. 

In fact, the industry is based on the understanding that as much as 70 
percent of the books published will make little or no money at all for 
the publisher once costs are paid. 

Some of these books are by writers who are experimenting with form or 
genre, or those who just do not have recognizable names. “You’re less apt 
to take a chance on an important first novel if you don’t have the profit 
margin on the volume of the big books,” said Lindy Hess, director of the 
Columbia Publishing Course, a program that trains young aspirants for 
jobs in the publishing industry. 

“The truth about this business is that, with rare exceptions, nobody 
makes a great deal of money.”

For many authors, pricing is a thicket of confusion. “None of us know 
what books cost. None of us know what kind of profits hardcover or 
paperback publishers make,” said Anne Rice, the author of “Interview With 
a Vampire” and the “Songs of the Seraphim” series. 

She said she did not know whether publishers had struck the right price 
for e-books. “For all I know, a million books at $9.99 might be great for 
an author,” Ms. Rice said. 

“The only thing I think is a mistake is people trying to hold back e-
books or Kindle and trying to head off this revolution by building a dam. 
It’s not going to work.” 

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Cheers,
Stephen