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E-book Pricing and Denying Reality

I found the NYT article on e-book pricing to be somewhat disheartening, when it comes to the ability of the big publishers to adapt to even relatively minor changes in the marketplace.

Carolyn Reidy, CEO of Simon & Schuster, says ““The concept that because a book is an e-book it should automatically be priced significantly lower than a paper book is one we don’t agree with. What a consumer is buying is the content, not necessarily the format.”

This is echoed by bestselling author David Baldacci, who says that e-book prices of $9.99 are “not sustainable.” If readers insist on cut-rate electronic books, he said, “unfortunately there won’t be anyone selling it anymore because you just can’t make any money.”

Let’s acknowledge that there are big financial interests at stake, and that statements for the New York Times may be for purposes of marketplace positioning, and not a reflection of genuine beliefs.

But, still, these statements make no sense. Ms. Reidy, by all accounts a sharp publishing executive, surely knows that, in a highly competitive marketplace, costs play a determining role in driving price (see Microeconomics 101).

Similarly, Mr. Baldacci has a lot at stake in the current publishing model and the current level of advances. But does he really think that $10 e-books mean you can’t make any money? Even though many of his books are selling at $7.99 – $9.99 in mass market format. Perhaps he means that if e-books at $9.99 replace a significant number of the sales of $28 hardcovers without dramatic growth in overall sales levels, this will ultimately translate in lower book advances for his new books. He may be right about this. Bu this is different than it being unsustainable.

The New York Times suggests that printing and shipping costs generally run about 12.5% of the cover price. I don’t know where they get this number from, but I think it’s a bit low.

Let’s propose a $25.00 300 page hardcover. It might cost $2.25 to print and ship (this depends on volume, of course) to the warehouse. Distribution to bookstores and distributors nationally can easily be 80 cents/book. Remember, we’re including the costs of warehousing, shipping, free freight, etc. That’s $3.05 per book. Now let’s assume we have a 35% return rate, which brings the printing and distribution costs to $4.12/book (I’m assuming 35% are pulped, but I’m also assuming that there are no restocking costs.) I’m not going to add $1/book for co-op fees, because these aren’t always incurred and there are some (lesser) on-line co-op costs. But keep in mind that this underestimates true printing and distribution costs. (I’m also leaving out the higher pre-press costs of physical books.)

By my count printing and distribution costs are 16.5% of the cover price, at least. But the relevant percentage is the percentage of the publisher’s receipts. If the publisher gets an average of 50% of the cover on sales (optimistic), then printing and distribution is 33% of the cost of sales.

So if the publisher get’s $12.50 for the hardcover, its marginal costs are:

Royalties (let’s assume 15% royalty, but that the book has earned out): $3.75

Printing and Distribution: $ 4.12

Its marginal profit is $4.63/book. This is marginal profit, so it leaves out all fixed costs: pre-press and marketing costs (marketing costs might not be quite fixed, although in practice they often are).

Now let’s look at an e-book:

Royalties (let’s assume these are 25% of net, as S&S and many publishers pay): $3.13

Printing and Distribution: $ 0

Marginal profit is $9.37/book.

What is the cover price on an ebook that yields the same marginal profit/book? It turns out to be $12.35. Remember, this assumes the same sales level. If sales go up (as they certainly will) at a lower price, then the price can be lower. Maybe $9.99 isn’t so far off.

There is lots of room to quibble with these numbers, but the idea that an e-book should be priced the same as the hardcover is transparently ridiculous.

I do understand authors’ desire to maintain large advances, and the big publishers’ fear that competitive pressure will force them to continue to pay large advances, even as prices fall. But in the end, advances will be driven by market forces, and will not be the driver of retail prices. The sooner a publisher realizes this, the better their chances of not being run over by those that do.

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