Monday 8 March 2010

E-books and the Challenge of Price

The Apple announcement of the iPad tablet has raised the question whether the hardware portion of the e-book market will be dominated by a dedicated reader or a multi-purpose device with e-book functionality. In addition to Apple, the sheer diversity of entrants into the e-book space, ranging from device manufacturers such as Sony, online purveyors such as Amazon, and book retailers such as Barnes & Noble, indicates the extent, to which the e-book platform is viewed, correctly or incorrectly, as a likely staple of how people will receive and read books and other contents in the near future.

No matter who wins, however, there still remains the question of how the e-book platform will impact on the traditional stakeholders in the publishing business, i.e., authors and publishers.The view is often taken the e-book is inherently a less costly production and distribution platform than the traditional book. The reason would at first glance appear to be obvious: with no printing, storage or shipping costs, the cost of an e-book must surely be set for a downward trajectory, with the result that books will become less expensive for publishers and therefore for consumers. This is supposedly true, even after one factors in the initial outlay for the reader device.

In truth, however, the situation is not so clear, as explained by Motoko Rich of the New York Times in a article that appeared on March 1 entitled "Math of Publishing Meets the e-Book". Rich notes that, while it appears that e-book titles will cost less their traditional counterpart, "... publishers also say consumers exaggerate the savings and [more importantly--NJW] have developed unrealistic expectations about how low the prices of e-books can go." Against this background, Rich goes on to consider the cost implications of producing and distributing an e-book and reaches some interesting conclusions.

As described by Rich, in order to understand the cost structure for the publisher, let's use a hardback book at a retail price of $26.00 as our baseline. The bookseller will pay the publisher half of that amount-$13. From that sum, the publisher pays $3.25 for print, storage and shipping (including returns). Printing and production functions such as cover design, typesetting and copy-editing, costs the publisher another 80 cents. Marketing will amount to a $1.00 or so, going up or down depending upon the title. Economies of scale on a per unit of book basis will also kick-in.

Let's not forget the author, of course. Assuming a royalty rate of 15%, the publisher must expend another $3.90. If an advance to the author has also been agreed-upon, there is a front-end outlay that may, or may not, be recouped against against royalties. This brings the net amount for the publisher to $4.05. From that the publisher still has to pay for office space and utilities. Based on the foregoing, it is easy to see why, for the traditional retail publishing business, blockbusters are crucial for financial success.

Will it always have a price?

And what about e-books? According to Rich, using the reported agreement with Apple, the following price scenario applies. The publishers will fix the price (although there have been some tension on this point), and the e-book retail platform then serves as an agent, with a commission of 30% per sale. Using a $12.99 baseline price (though there is no firm notion of what the price point range will be), the publisher is left with $9.09, from which he has costs of approximately 50 cents for file conversion and digital typesetting, plus an additional 78 cents. The author's royalty will a matter of negotiation, of source. Rich posits a 25% royalty on either gross revenue or the consumer price. All of this leaves the publisher with an amount in the realm of $4.56 to $5.54, to which overhead and related expenses must then be covered.

This looks like a good deal with the publisher. Not so fast though. C0ntrary to my impression, Rich suggests that publishers recoup costs and make material profits in the paperback segment of the book business. That argues in favor of a mixed model, where both the traditional book
industry and the e-book business will co-exist. However, if the price for the e-book product is similar to the price of a paperback book, the result may be that the paperback industry is severely hurt, eroding the profit potential for the traditional book industry. Whether the hardback market will itself then survive is a question.

Based on the foregoing, we can think of a number of less than socially desirable outcomes in an e-book world. First, there may well be a "e-book reader/computer tablet" divide between the haves and have-nots of the hardware device. Second, it remains to be seen whether the e-book space will allow for the kind of marketing and distribution that allow the traditional book business to introduce authors as well as provide the socio/tactile experience that only takes place in a bricks and mortar bookstore. If the traditional book business shrivels, the combined upshot may be fewer with the resources and access to books, and less choice for those lucky enough to have both the resources and ready access to book contents.

This may be nothing compared with the e-book divide

One thing is clear--we are only in the infancy of the e-book world, with consequences both benign and malign, socially beneficial and socially harmful, intended and unintended, before us.

1 comment:

Anonymous said...

A few thoughts:
Another possibility is that, as in the early days of cellphones, most of the public will view the users as the "fortunate elite" (which is what most people think of Mac users anyway), while still reading "normal" books.
The real revolution will probably begin when they start giving away the ereaders for free, when bundled with a large purchase, or with a subscription to an online bookstore (with a guaranteed minimum purchase). Alternatively – quality ereaders may be packaged into the next generation smartphones – thus increasing market access.
Finally – currently the widely different formats of ereaders seriously impact on their attractiveness (think betamax/VHS or more recently HD-DVD-Bluray). In spite of the fact that almost all of them read PDF most people fear buying into products which may become outdated sooner rather than later. However – it is probably only a matter of time before some form of format unification will come into force, which should increase attractiveness significantly.