Wednesday, June 17, 2009

Should E-Books Be Cheap?

Let's look at a recent Time Magazine article about the Amazon Kindle.

Here are the two things I picked out:

First, Amazon is selling ebooks at $9.99 for Kindle, and is taking a loss on this because publishers are charging them standard hardcover rates.

Second, according to small press publisher Dennis Johnson, nobody can make a book that sells for $9.99. You can save on shipping and printing, but that's only a small fraction of what it costs to make a book.

Now, at the risk of annoying print publishers everywhere--and print publishers have been very good to me and I consider myself grateful to have worked with some wonderful publishers--I'm going to politely disagree with the above statements.

The music industry, for all who have been paying attention, has never recovered from the digital mp3 revolution. I doubt the skewed tales of loss from the RIAA are accurate, but I have heard that iTunes is now selling more music than the Walmart, the world's largest music retailer. I also know, anecdotally, that my friends with iPods have managed to fill them with music, and very little of this music was bought. Rather it was borrowed, shared, or stolen.

There are several causes for the profits being down in the music industry. CDs cost too much money, especially when consumers often only wanted one or two songs on a disc. iPods and digital equipment have replaced stereos as the preferred method of music delivery. When fans set up distribution networks, like Napster, to share music, the RIAA tried to shut down these networks rather than learn to use the new technology to their advantage.

Apple finally figured out that 99 cent songs and no DRM is the way to go. But it took them way too long to get to that point, and as a result, we have a healthy, active piracy community. In fact, 13 of the top 100 most visited websites are file sharing sites, and that doesn't include Usenet, Limewire, or eMule.

So let's recap on the things the music industry did wrong.

1. High price.
2. Not adapting to the new method of delivery.
3. Not adequately dealing with piracy.

Hmm. Now if we look at what publishers are doing, we can draw some parallels.

First, in this economy, $27.95 is too much for a hardcover work of fiction. Why do they cost this much?

I've done other posts about the cost of books, and why publishing uses an archaic business model. To recap:

1. Only one out of five books makes a profit (two break even, two lose money.)

2. A fifty percent sell through (books printed vs. books actually sold) is considered by many to be the industry average.

3. The books that don't sell are remaindered (sold at a loss) or destroyed.

4. Retailers take books at a 40% to 60% discount. (we'll include the distributor cut in here as well.)

5. The author earns between 10% and 15% of the cover price.

6. Printing and shipping and corrugation (making boxes and displays) can cost 10% or more of the cover price, depending on the number of returns.

7. Marketing, advertising, and coop all are factored in to P&L.

8. Books have certain set up costs; typesetting, line editing, artwork, etc.

9. That means a publisher earns perhaps 15% to 20% of a book's cover price, and they have to run their entire company on this small amount.

So it seems that maybe it is impossible for publishers to lower their prices.

And yet...

No printing, no shipping, and no distribution (warehousing) costs, along with no returns, actually can save a big chunk of money. The way these costs are broken down make it seem like this is a very small part of a book's price. But, in fact, these are the only set costs, and these are the costs that all other costs are based on.

All the other costs are negotiable.

Publishers make money on paperbacks, which sell for $6.99 to $10.99. So it isn't about price, it's about profit per unit.

Print publishers are basing ebook prices on the profit per unit figures of print books. They have to do this, because if they sell ebooks for less and don't make up for the loss in volume, they will lose money.

But if a major publisher switched completely to ebooks (which may be what the future holds) a new pricing and profit structure will evolve. Costs to the publisher will be much less, and the cost of running a company will be much less.

When the cost of printing, shipping, and warehousing is eliminated, a lot of jobs are eliminated. This saves money.

When the cost of returns no longer figures into a book's profit margin, this saves money.

When books no longer go out of print, this earns money. In fact, every book, rather than one out of five, can be profitable.

When gigantic marketing and advertising budgets aimed at moving print books are slashed, this saves money.

No coop in bookstores, no author book tours. This saves money.

"But what about author advances?" publishers may ask. Tell you what--double my royalty rate for ebooks, I won't take an advance.

What we actually have isn't a situation where ebooks cost as much as print books. It's a situation where publishers must charge the same for ebooks as they do with print books if they want to keep their infrastructures intact.

But the fact is, consumers don't care about publishers, or their infrastructures. They care about books. And they want to pay less for ebooks.

They also want to be able to get ebooks without copy protection, just like they want their songs without copy protection. ITunes dropped DRM because their customers hated it. Will publishing adopt a similar stance?

I just got this newsletter from a large publisher:

We have engaged Attributor, a leading anti-piracy protection service, to monitor the web for instances of unlawful use of its authors’ books and content.

How much do you think that is going to add to the cost of ebooks? And how well do you think it will work, considering DRM and Macrovision and RIAA lawsuits and every other form of anti-piracy protection has failed miserably? And of course, Attributor will be used in conjunction with DRM.

I'd love to see Attributor take on Usenet, which has billions of illegal downloads per day and no way to track them. Or Rapidshare, which is based on password-protected private uploads and downloads using encrypted file lockers. Or any torrent tracker, for that matter. Pirate Bay and Mininova have been sued a gazillion times to no effect. And the private trackers are invite-only---good luck Attributor in getting an invitation.

Do you really want to know how to get rid of piracy? Here's how:

The rules of supply and demand don't work in a digital world, because the supply is unlimited. You don't fight piracy with weapons. You fight piracy with cost and convenience.

Let me state that again, because no one seems to get it.

The rules of supply and demand don't work in a digital world, because the supply is unlimited. You don't fight piracy with weapons. You fight piracy with cost and convenience.

If there were a central hub, where you could easily search for ebooks and get them at a reasonable price, there would be no need to pirate books.

Amazon is not that central hub. The Kindle is too expensive, their ebooks are too expensive, and the Kindle uses DRM and a proprietary format that is difficult to convert. Proprietary exclusive formats don't work. That's why Betamax and DAT failed.

Publishers, if they truly were looking toward the future, would make themselves into these hubs, eliminating the need for Amazon. But they're still focused on dead trees.

Here are some possible future scenarios:

--Publishers learn from the mistakes made by the music industry regarding digital content, and lower the prices for digital books. This could result in more inexpensive digital books than expensive print books being sold, leading to a decline in print sales, and an overall drop in the gross profit of the industry, even if there are a greater number of books sold. But they would survive, and after restructuring, possibly thrive.

--Publishers keep the price of digital books high, in which case more and more people boycott expensive books and support newer and cheaper authors. Readers also begin to illegally download books in larger numbers, as they do with music. Publishing dies.

The goal is to figure out what readers are willing to pay for the ease of downloading a book at a central distribution hub. Will they pay $5.99? Will a percentage of them buy it from another site for $2.99 and then convert it to their desired format themselves? Or will some of them just pirate it?

--Publishers realize their business model is based on printing and distribution, and they radically alter their companies in order to succeed in a digital world. That means becoming their own stores/distributors like Amazon, offering exclusive content.

Wal-mart has proven that “one stop shopping” is what America wants. Why go to a mall, with 50 stores, when one store carries everything from milk to tires to pants to books?

And yet, Green Day didn’t release their latest CD with Wal-mart, and it was still a smash hit. People will go elsewhere for exclusive content if they want it bad enough.

If I were a publisher, I’d consider what books I have under contract, and figure out how to sell them without splitting the money with a distributor/retailer such as Amazon.

--Authors realize that they don’t need publishers. Why should they split revenue with a publisher when they can upload it to the world themselves?

Currently, I'm making $110 a day on books NY publishing didn't want. That's not a lot of money, yet. But the average advance for a novel is still $5000. Between April 8 and June 30, I'll have earned $5000. And my numbers are going up.

--Amazon realizes it doesn’t need publishers, and deals directly with authors. They've already begun publishing print titles, and they've allowed for authors to publish print and ebook titles on their own. Eventually, Amazon is going to start getting some big download numbers for their ebooks, and they'll approach a big author with an exclusive royalty deal.

--A third party ereader is created by a company to compete with the Kindle. It will be inexpensive, able to read a variety of ebook formats, and have upgradable software and memory. This will lead to ereaders becoming as commonplace as iPods, and be the beginning of the end of print.

--Ebooks will become multi-media experiences like DVDs. Books will have author annotations and interviews, be bundled with audio versions, and contain extras such as short stories, early drafts, dictionaries and glossaries, and be directly linkable to forum discussions and book groups. Who would still want paper?

There's a lot to consider when it comes to e-book and the future of publishing. And I may be dead wrong on a lot of these predictions. Hell, I may not know what I'm talking about. Even with the economy, and bookstores losing money, and revenue down, publishers are still alive and kicking, just like they have been for hundreds of years.

But I do think e-books are the future. And I don't think print publishers know how to handle that.

There was a recent announcement that Simon & Schuster was joining forces with Scribd, an ebook download hub, and offering their catalog of ebooks for 20% off print cover price.

I wish S&S much success, but I don't predict it. 20% off the print price is a insignificant discount. Maybe if they slashed prices to a few dollars each title it would catch on, but I don't believe Scribd is a big enough hub yet, and it doesn't get nearly the traffic Amazon does.

But because I'm a cutting edge early adopter who can predict trends (ask Barry Eisler), I offered my ebooks on Scribd 15 days ago, at the same price they are available for on Kindle, less than $2 each.

In 15 days, I've sold zero books. Compare this to over a hundred books a day I sell on Amazon.

Scribd is not the future of epublishing.

If I were Simon & Schuster, or any big publisher, I would digitize my entire backlist and sell it on my publisher website for $2.99 a book, splitting royalties 50/50 with the author, and advertising the hell out of it in print, radio, and TV. Scribd, Amazon, and other e-tailers could have the titles for slightly more, factoring in their mark-up.

I would also invest heavily in new ebook reader technology, perhaps partnering with Apple or Google or Sony, to make a cheap, better competitor to the Kindle.

But I don't predict either happening anytime soon. Publishers, like oil tankers, take a long time to change direction. That doesn't mean publishers aren't smart--they're some of the smartest folks I know. But being smart, and being willing to scrap a business model you've used for fifty years, are two different things.

It will be interesting to see what the future holds. But as an author, I'm emboldened that with enough titles under my belt, in the future I might actually be able earn a living uploading my own books digitally, rather than depending on someone else to sell my books for me.

And I'm pretty sure I'm not the only one who believes this.