By Stephen Windwalker
Originally posted March 1, 2010 - © Kindle Nation Daily 2010
Here's how her numbers play out for a $26 hardcover:
$26.00 Suggested retail price
$13.00 Wholesale proceeds to publisher
$3.25 Production, storage & shipping
$0.80 Pre-press: cover design, typesetting and copy-editing
$1.00 Marketing
$3.90 Author royalties
$4.05 Publisher's gross margin
She then compares these figures with an ebook at a $12.99 price point:
$12.99 Suggested retail price
$9.09 Wholesale proceeds to publisher
$0.00 Production, storage & shipping
$0.50 Pre-press: cover design, typesetting and copy-editing
$0.78 Marketing
$3.25 Author royalties
$4.57 Publisher's gross margin
She doesn't take the next step -- which would be to run the numbers at the current ebook retail price point of $9.99, built as is her her $12.99 ebook math around the so-called "agency model" which calls for the retailer to take a 30% cut and send 70% off to the publisher. But here's how the $9.99 price would look based on the numbers inherent in Rich's piece:
$9.99 Suggested retail price
$6.99 Wholesale proceeds to publisher
$0.00 Production, storage & shipping
$0.50 Pre-press: cover design, typesetting and copy-editing
$0.78 Marketing
$2.50 Author royalties
$3.22 Publisher's gross margin
Naturally, different readers may have a different take-away from all this, and Rich's balanced approach shares useful perspectives from bestselling novelist Anne Rice and several industry insiders.
While it is obvious from these figures and from common sense that both publishers and authors will make more per unit on ebooks priced at $12.99 than they will make on ebooks priced at $9.99, it is equally obvious that the real profits for both parties will come from volume. If an ebook title priced at $9.99 will sell 50 to 100 percent more copies than the same title priced at $12.99, it's the lower price that will reap more profits and more author royalties.
The other motive for publishers, of course, is based on their concern that ebook sales volumes directly cannibalize hardcover sales volumes, and Rich quotes publishing consultant Mike Shatzkin succinctly on this point: “The simplest way to slow down e-books is not to make them too cheap.”
But there's another good economic reason why publishers ought to be embracing aggressively priced ebooks, and it is one suggested by industry veteran and chronicler Jason Epstein in his current New York Review of Books piece: "the genteel book business that I joined more than a half-century ago is already on edge, suffering from a gambler's unbreakable addiction to risky, seasonal best sellers, many of which don't recoup their costs," Epstein writes.
As ebooks reach a tipping point where they can actually offset the calculations that a big publisher must make in sizing a 6-to-7-figure print run for a prospective bestseller, they can provide a powerful hedge for the publisher against the kind of huge losses, from unamortized front-end production outlays, that are symbolized so vividly on hundreds of bookstore remainder tables all over the country each year. Regardless of whether it's price at $12.99 or $9.99, you'll never see an ebook on a remainder table.
Note: I noticed via Teleread that the Shelf Awareness website challenges the accuracy of the Times piece because many booksellers get less than the 50 percent discount referenced by Rich, but I think S.A. is making a distinction without a difference. Small independent bookstores buy most of their hardcovers not from the publishers but from wholesalers Ingram or Baker & Taylor, and those wholesalers get a 50 to 55 per cent discount from publishers, so the overall economics of a 50% slice hold up pretty well if we are looking at the math from a publisher's point of view, which is what Rich was doing.
5 comments:
When you put the "author royalties" of the 9.99 version as 2.50, realize that few authors ever make more than a few thousand dollars on a book. A $3 difference in sale price is not going to decide whether a book hits the NYT bestseller list (and makes some real money), but it might make a difference in feeding the author's kids for another month.
I don't want to see Kindle books go up in price, but we have to be realistic about it. We've always known Amazon was selling books at an artificially low price to do that.
Stephen,
I don't know if you noticed this, but even though the title of Rich's NYT article is "Math of Publishing Meets the E-Book," the title of the webpage that displays it is "Making the Case for iPad E-Book Prices - NYTimes.com." (You should be able to see this by looking at the title bar of your web browser.)
The first title conveys a sense of objectivity and impartiality, while the second makes one wonder if the article contains bias, or was carefully crafted to fit an agenda.
Having noted the significant (to me) difference between these two titles, I now have to wonder about the accuracy of the "costs" the author has used to arrive at these figures.
I'm not saying they're wrong, but I can't automatically assume that they're right, as I might have done had the titles matched.
Just my take on it.
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@ChrisB, thanks! I just devoted this post to the issues you raise:
About eBook Prices and Author Royalties: Price Elasticity and the Demand for Books http://bit.ly/9kQaYw
From http://www.fair.org/blog/2010/03/:
Read the Chart, Not the NYT Article, to Get the Straight Dope on Book Profits
Tuesday, March 2nd, 2010
(Part One)
There's a certain category of newspaper article where you're better off ignoring the text and just looking at the accompanying graph. Such an article is "Math of Publishing Meets the E-Book" (New York Times, 3/1/10), by Motoko Rich.
The context for the article is the fight between publishers and Amazon over how much to charge for an electronic copy of a book; Amazon wants to price them at $10, whereas publishers would prefer to charge $13 or $15. Here's what you learn about publishers' profits from the article itself:
In the emerging world of e-books, many consumers assume it is only logical that 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...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?... On a typical hardcover...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.
An e-book [priced at $12.99]...leaves the publisher with something ranging from $4.56 to $5.54, before paying overhead costs or writing off unearned advances.
What's missing from the article's account is how much the publishing company makes from a $1o e-book--but you can learn the answer from the attached chart: $3.51 to $4.26, depending on how big a royalty authors end up getting. So publishers get about as much per-unit profit at $10, and quite a bit more at $13 (let alone $15). So it would seem if the question is, can publishers afford to publish e-books for $10, the answer would be "yes."
Only that's not the conclusion of the article--whose alternative headline is "Making the Case for iPad E-Book Prices." Rich follows her financial calculations with a series of unfortunate events that will occur if the publishing industry does not make more money from e-books than from regular books:
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.
Somehow I doubt that the book industry has so much capital tied up in warehouses that their emptiness is going to bring publishers to their knees.
(continued next post...)
From http://www.fair.org/blog/2010/03/:
Read the Chart, Not the NYT Article, to Get the Straight Dope on Book Profits
Tuesday, March 2nd, 2010
(Part Two - continued)
While the piece is framed in studiously neutral Timespeak, Rich's conclusion seems to be this: "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." Funny, you would think new authors would benefit from a switch to a technology where it cost much less to either produce or purchase a book.
The most eye-opening thing about the Times' chart--not spelled out in the article--is the shifting contributions of the various players in the publishing business. With the traditional book, the publisher pays an author $3.90 per copy for a manuscript, adds $5.05 worth of editing, printing, marketing etc. to it, and takes a profit of $4.05--about the same amount that the person who actually wrote the book gets. With the e-book priced at $13, on the other hand, they're paying the author between $2.27 and $3.25, adding $1.28 worth of value and taking between $4.56 and $5.54 in profit--roughly twice as much as the writer gets.
Publishing houses are going to have a tough time in the digital era explaining why they are entitled to so much for doing so little. But not to worry--they'll always have the New York Times to help them make their case.
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