Ebook Math New York Times style

A recent article in the New York Times takes a swipe at explaining ebook pricing. The analysis breaks down poorly, in my opinion, by ignoring the elephant in the room.

That elephant is this: publishers have yet to control their own overhead. If they were to reduce their overhead, by moving out of Manhattan and liquidating that very valuable real estate, their sunk costs would plummet and their profit margins would rise. This is how every other business does things. Until book publishers embrace that reality, they will remain mired in an old and failing business model.

Ebook Conversion costs.: The NYT report publishers as pegging some set costs for an ebook at:

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.

I’ve beaten this drum before. Writers deliver their manuscripts in electronic form. I’ll grant that I’m a technophile, but starting from an electronic form—and be aware that most publishers are using Adobe InDesign which has an automatic conversion feature to epub—it would take me eight hours or less to put a book in shape for digital publication. Even paying myself $50 an hour, we’re talking $400. Copyediting could be significantly more—but if the book is that badly off, why did you acquire it in the first place? Regardless, both amounts are fixed costs, not scalable.

What about if they have to digitize the book, all that scanning and everything? Are they going to? Bantam has the last two books of my DragonCrown War series available as ebooks, but not the first two. If they were going to be digitizing backlist, you’d think they’d start with books in that situation. And what about doing an electronic omnibus edition? They don’t them, and why not? Because they’d never do it for print, so how can they do it for digital? It makes no sense to them.

The promotion budget of 78 cents per book is a real puzzler. Again, promotion is a sunk cost, not scalable. Each book has a promotions budget ranging from $0 to millions. Once it’s paid out, no more promo cost. But when was the last time anyone saw the typical first-novel with a promotions budget? You only get money spent promoting when the publisher has gone nuts in a bidding war, jacking the advance for a book so high that there is no realistic expectation of ever earning it back. This 78 cents per book figure is pure fantasy.

Consider the Bookstores: The NYT suggests that part of the reason publishers want to jack up the prices of ebooks is to save the poor bookstores:

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.

“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.”

Read between the lines: the expansion of bookstores in the 1980s and 1990s to these big-box megastores to crush independent bookstores everywhere has left the major chains overextended and bloated beyond all reasonable expectation of profitability. Their business model is failing, too. They need to expand their online presence (to fight Amazon), get into the digital marketplace (with the Nook and other devices), close stores (like Waldenbooks outlets) and, in the near future, shrink their megastores to things that more closely resemble the independents they crushed, which will allow them to hand-sell books and make use of POD publishing in a back room.

Book publishers want to prop the bookstores up because that’s where they get most of their revenue. But those stores are in trouble, and the returnable/commissions model has been unworkable for decades. The fact is that the returns policy means that for every book sold in the USA, two are printed. Not only is it wasteful of resources, but it encourages sloppy business practices. If a store can over-purchase a title, then return everything that did not sell, where do they have to think? Why do they need a promotions budget? They’re just a warehouse with good lighting and carpet, not a true retail business driven to make a profit—and this combination of gluttony and sloth has brought bookstore chains to the brink of collapse.

And this surprises you why? The NYT offers the following as evidence that folks in publishing are completely detached from the real world:

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.

Two things are wrong with this: Authors make a percentage of the cover price. This means that the more books sell, the more they make. The author has done his job at the point where the publisher decides to go to work. The profitability of any book is not in the hands of the author, it is in the hands of the publisher. Now, if 70% of all books make “little or no money” for publishers, the fault, dear Brutus, clearly falls with the publishers. Either they’re not picking books that can sell, they’re not pitching them at the right market demographic, they have incurred unreasonable costs in producing the book or are engaged in other silly business practices that guarantee that financial failure is the norm, and success is an accident.

All of the above is the most likely scenario.

The New York Times article has other gems in there, like noting that publishers have to account for unearned advances, so they have to write those off. Really? Get more realistic in what you offer; and promote books so you maximize the profits out of the ones you acquire cheaply instead of doubling-down on loser bets. In other words, act like a business, not some badly run, Triple-A baseball franchise.

Here is the pity of all of this: traditional publishers are sitting on roughly fifteen years of content for which they own the ebook rights. They have asserted control well beyond that, but the courts and contracts dispute their argument. If, instead of worrying about the cost of acquisition going forward, they were to cull their lists and do sensible things, like pull series back into print, like creating omnibus editions of books (taking a page from media outlets that are bringing out DVDs of every old TV series ever, and doing full season compilations as well as compilations of film series); they would only incur the cost of digitization, since all those other costs were covered years or decades ago. It used to be, in science fiction anyway, that backlist sales kept many publishing houses afloat. They can revive that older revenue stream and it will buy them time to transition to the new age of publishing.

My bet is they won’t, and for two reasons. First, backlist has been dead since 1988, so most of them have forgotten it exists. Second, and far more dangerous, is that authors themselves own the ebook rights to much of that backlist. Once authors realize that we can do it ourselves and make 70% of the retail price of any offering or more, our incentive to accept 25% of net (the last deal I was offered)—which translates to 17.5% of retail price—goes away.

And, with it, goes traditional publishing.

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11 Responses to “Ebook Math New York Times style”

  1. Great post!

    It’s clear that a lot of the big business models in America are unworkable, and rather than adapting, the entrenched interests want to whine, drag their feet, and blame everyone else for the problems.

    Also, I really like the new look of the blog.

  2. In another industry, businesses gathering together and determining the sales cost of a product would be called price-fixing. And that is precisely what is happening. They’re very publicly disseminating notional cost estimates to justify maintaining a price point that is nothing more or less than a best guess estimate of what the consumer will pay.

  3. Thanks, Tim…

    Kat dragged my design kicking and screaming into the 21st century! It’s great!

  4. Excellent essay, Mike. When I read the article I thought “Wait ’til Mike sees this!” It’s both sad and amusing to think that the publishers are trying, like King Canute, to order the tide to roll back. Keeping the price of ebooks high to preserve sales of printed books… yeah, that will work out fine. I’m sure they will be just as successful as the music industry in keeping digital products from advancing their market share.

    BTW, the new web site design looks very sharp. Kudos to all responsible.

  5. Is it possible that the Manhattan real estate is paid for? Those publishing houses have been around for a long time.

    Every time they come out with a new argument for the way things should be priced, I scratch my head and say, WTF!?!

    I don’t think their math means what they think it means.

  6. The Manhattan real estate might be paid for, in which case selling it would bring in a lot of revenue. Regardless, the cost of living in NYC contributes to unnecessary overhead. Taxes (and there is a local income tax) and the cost of other services are higher than they would be elsewhere. But you’re right, their math is not the math the rest of us learned.

  7. Some good points here, Mike.

    Traditional publishing is a risky and low-margin business. Such practices as returns and having to work through distributors, makes it tricky. There is a lot of upfront cost (author advance, overhead, marketing, printing, warehousing), and in my experience in the small press there’s little to no room for error… in ‘not picking books that can sell’, or ‘not pitching them at the right market demographic’, or ‘having incurred unreasonable costs in producing the book’.

    I found the NYT article reasonably informative. The public has little to no understanding of the economics of book publishing and the article gives a roughly accurate overview. From a publisher’s perspective, the main difference between the costs associated with publishing an ebook and a print book is the printing and warehousing costs. The distribution cost is looking to be a lot lower with Apple getting into the game (Amazon had adopted a similar percentage to the traditional print model because they were the only significant player and could get away with it.)

    I argue that the numbers in the NYT article make sense looking at it on a per book basis for new titles… which are the only books that publishers seem to want to charge higher amounts for. So if the publisher makes $13 per hardcover and $3.25 of that is printing and warehousing, that leaves $9.75 to cover the rest of the expenses. To get that same $9.75 from an ebook, assuming Apple’s 70/30 split, the ebook price would have to be $13.93. Of course this doesn’t take into account possible differences in the volume of sales.

    Still, authors now have the ability to self-publish and get paid for it. It might be a better model for some authors to do just that if they want to go electronic only, or if they have a backlist and own the electronic rights. I think publishing backlist books in electronic form makes a whole lot of sense for both publishers and authors.

    But in my experience, most authors benefit from a relationship with a publisher. Most authors don’t know (or don’t want to know) how to take on the publishing of their book. Even if you remove printing, warehousing, distributing, there’s still typesetting, editing, proofing, marketing, cover design, cover art, jacket copy, etc. Some of these things (like editing) need to be done by other people for the book to be any good.

    In any case, thanks for the post. Things in this field are getting very interesting!

  8. Living in Mississippi, I am amazed at what some people pay in property taxes in the “Tier 1” real estate markets.

    The taxes annual property taxes can be more than my house cost! And, if I understand correctly, the utilities aren’t exactly cheap, either.

  9. I read your article and could only think of how it seems extremely similar to the music industry. I remember when albums were 7.99 on cassette. Then CD’s put the price over $10. Even when the cost to produce a CD became less than a cassette, the price was still a few dollars higher for a CD, and eventually reached $17.99. Now in the digital age, it’s taken years for the album prices to finally approach $10 consistently for an album even while the prices on an individual track has gone up.

  10. I have to say that there are a few publishers who actually understand ebooks and how they should be done. First and foremost, Baen Books. They’ve actually been doing ebooks since 1999, and it’s sad that more people don’t know about them. Take a look at their models at http://www.webscription.net/ , and note that several publishers have signed up to go through this format.

    Fictionwise, http://www.fictionwise.com/ , is another decent one I know of. The prices there are closer to paperback prices for the most part, instead of hardback.

    Why the rest of the industry and the media seem to ignore these sites and publishers, I don’t know. But people need to spread the word that there are a few out there who do things right.

  11. I’m a bit confused on the pricing here. Are we talking about converting existing digital files of books that are presently only available as paperbacks and hardcovers to eBooks? Or are we talking about taking the author’s file of his first draft and using an underpaid copyeditor and software such as Grammarian to clean it up? A traditional book publisher will suggest changes in structure, tone, and the like—and in fact, will only buy a book if the proposal promises that the “edit” can be done by him in a day. Then the second draft is read and goes to copyediting, where it is line edited and fact checked. Then there’s proofreading of the manuscript and perhaps a cold read against galleys, which are also proofread. We’re far past 8 man-hours here!

    I completely agree with your assessment about the profitability lying in the hands of publishers. I have plenty of clients eager to spend money and time promoting their books, but they’re not experts. Do traditional publishers work with them, advising them, honing their pitches and soundbites? Do they pay for ads in specialized magazines or on niche websites to back up the rave reviews those outlets gave the book? Do they ask their roster of established authors for endorsements, forewords, and promotion of the newbies? Or do they resent cooperating with freelance publishes, and give the author 3 weeks of mindless Jiffy bag stuffing before they resent getting so much as an email from the author? Have I been down this road before as an author myself and a ghost/editor of others’ books? You betcha.

    Publishers treat backlist titles like the rich treated the poor relations back in Jane Austen’s day. Scrap the buildings, overhead, and returns policy for bookstores, breathe life into the backlist, and then let’s see where we are.