Ebook-troversy: A hard look at the numbers.
(My apologies in advance is my math is not right. I’m a reader, not a mathematician. If I’ve done the math wrong, please let me know–without being a complete asshat, or I will give you my special asshat award. I will.)
So, I’ve been pretty tough on publishers lately about this whole ebook thing. I tend to get heels-dig-inny when I feel like someone’s trying to put one over on me–and, to be honest, that’s how I feel when I read a lot of missives from publishers. There’s a recent post from IPG about how ebooks aren’t even really digital content. Their argument: while it is, yes, a digital format, the process of creating the book is still the same. The language isn’t digitized. Therefore, this isn’t a digital product.
Okay, yes, yes. I know that there are other costs incurred when creating books. I think most readers who are reading the more expensive books (i.e., not the modern equivalent of dime novels) are aware that publishers employ numerous editors, proofreaders, marketers, and so forth. For me, this has never been the point of arguing that ebooks should be cheaper. I know there are costs that must be met. Ebooks, though, have advantages that print books do not, and that has been a lot of the basis of my thinking that ebooks should be less. Not $0.99, but less.
But, hey–I could be wrong, right? I’m not an industry professional by any means. Even though I’ve heard some ridiculous arguments thrown out that don’t support more expensive ebooks at all, that could just be because the people making the arguments are bad at arguing. So, I want to run some numbers and see where we end up. For that, I’m going to base my estimates off of IPG’s post, which details some of the costs of publishing a book. I’m going to assume their numbers are accurate, since they’re in the business, and all.
Let’s break it down.
Here’s what IPG says about the breakdown of printing a treebook:
The royalty rate is usually 10% of the cover price for a hardbound book, 7.5% for a paperback, increasing by a few percents if certain levels of sales are achieved. So an author makes $1.12 a copy on a $14.95 paperback. A 10,000 copy sale of that paperback—a very respectable performance in the estimation of most publishers—will earn the author about $11,000; not bad, except it takes a year or two of very hard work to write a book. Most authors have to keep their day jobs.
What does the publisher make? He will sell that $14.95 paperback to the booksellers and book wholesalers at, on average, a 50% discount from the price on the cover–$ 7.48 in the case of this $14.95 book. For 10,000 copies sold this will amount to $74,800. The printing of the 10,000 copies will run about $1.50 a copy or $15,000 total. We have calculated that the royalty for the author will be $11,000. So the publisher nets $48,000 [Note: by my math, this should be $48800], not a bad day at the office except this income also has to cover the cost of that office, and the warehouse, and the staff. When all these factors are taken into account, the publisher’s share is about the same as the author’s.
(Okay, firstly, something is sticking in my craw here–IPG says that the paperback will wholesale for 50%–a pretty standard discount in the retail world for selling wholesale–but later complains about the same discount for wholesaling ebooks. What?)
So, for a 10,000 trade paper print run, the publisher nets about $11000 profit, according to IPG, who says it’s “about the same” as the author’s take. We’ll use that number, since we don’t have the actual figure; I’m going to treat it as a “cost” of the book when I discuss ebooks, since I don’t want publishers to lose out on their profitability, right? So, the publisher has made their $11000 off of a book, which, yeah, really doesn’t sound like much to make. In order to make another $11000, the publisher has to invest another $30000 in printing and warehouse/shipping fees for a second run of the book if it’s the same number of copies (“Warehousing and shipping will add another $1.50 to the real cost of selling a printed book”–which makes $15000 for a 10000 book run. From the article). But! On the second run, the publisher would, I imagine, make more than the $11000. If you’re factoring in the cost of paying for the book in a single run, as far as editorial expenses and marketing and whatnot–and, from what I gather, most books do not have a second print run, so this idea makes logical sense to me–the second run of the book would have that already paid for. Like I said, most books probably don’t get a second run, but, if it did, and all of the copies sold, the publisher would actually get an extra $22800, according to IPG’s numbers and assuming the editorial costs were paid down on the first run.
(Math clarification: $74800 copies sold wholesale in a 10000 print run – 11000 to the author – 15000 shipping & warehouse – 15000 printing – 11000 original publishers’ share= $22800 extra after editorial and marketing expenses have been paid.)
Still, that’s quite a bit of money to invest, even if you’re getting a 113% return on your second-run printing/etc investment if everything sells–because what if it doesn’t? Worrying.
(Math clarification: ($11000 publishers’ take + 228000 extra) / $30000 printing expenses = 1.1266 x 100% = 113%)
Let’s say that a publisher decided to release another book only as an ebook. Looking at the numbers provided, a “10,000 copy run” of an ebook would cost about $44800, including the author royalty, the editorial/design/marketing expenses, and the publisher’s share, if we want to keep that on par with a treebook–and for our purposes right now, we do. (Math clarification: $11000 author royalty + ($48800 publisher net – $15000 warehouse expenses) = $44800) That would bring the wholesale price up to about $4.48 a copy; going with the 50% model, the retail price would end up being about $9.
Do you see what’s been under my skin about this scenario?
If you answered, “ebooks don’t have a limited print run,” you’re exactly right.
With ebooks, there’s no scurry to try to make all of your money back in what might be your only print run. A publisher could sell 5, 500, 5000, or 50000 ebooks with one investment. There’s no decision to gamble on laying down another 30-large on a second run, because you just use the same ebook copy you’ve always had. At $9 retail per ebook, publishers net the same profit, according to IPG’s numbers–yet, publishers hate these $10 ebook shenanigans. And Amazon could, as IPG even suggested, slim down the margins even more since they don’t have to make as high of a profit margin off of an ebook, which costs less than physical items to sell, and ebooks could go down to $8 or even $7, still making the same profit for the publishers that treebooks get and also making a profit for Amazon. At a lower price point, more copies would probably be sold, and profits would increase. Because there’s not a limited print run on ebooks, fluidity with pricing can happen and even increase profits through higher volume. There’s also no $30000 gamble to sell another 10000 copies, and to me, a lower price point directed to sell more copies seems less risky. (The lower price could be implemented later, even–to give the book a chance to make the full retail price on the first “run.”)
And the agency model? Even for $9 a book, less than what the publishers seem to want us to pay, they’re still going to make more than treebooks because they sell treebooks wholesale and I calculated the $9 price point off of wholesale profitability. That’s an extra $18200 per 10000 book “run” using the agency model, for a total of $29200.
(Math clarification: $9 retail price x .70 agency model percentage = $6.30 to publishers per book x 10000 books = $63000 – $44800 cost to publish ebook (including publisher take, as above)= $18200 extra money from the agency model + $11000 publisher take added back in = $29200 total profit from $9 ebook using the agency model)
Also, using the agency model, publishers could make the same profit off of ebooks as they would a trade paperback run at an even lower price point than $9.
For example, if they sold 10000 copies of an ebook, ebooks could retail for $6.40 and the publishers would make exactly the same profit as a 10000 trade paper run.
(Math: $22800 editorial/etc + 11000 author royalties + 11000 publisher take for a treebook run = 44800 / 10000 books = 4.48 cost per unit (at 10000 books) / 0.70 agency percentage = $6.40 retail)
At $6.40 rather than $9 (or $9.99), I think it’s safe to assume that they could sell more copies. What if they sold 15000 copies?
15000 x $4.48 = $67200 – (22800 editorial + 16500 author royalties for 15000 copies) = $27900
Hmm. More than double what they netted off of a trade paper run, and almost as much as they made off of the $9 ebook at 10000 copies. I wish I were fancy at math, and I could make a graph showing how many copies they’d have to sell at the $6.40 price point to overtake the profitability of the $9 price point. If there are any mathy people out there, and you wanted to do that, that would be awesome.
What if they were doing the wholesale model, but the price was still $6.40?
10000 x $3.20 = $32000 – (22800 editorial + 11000 author royalties) = -$1800
15000 x $3.20 = $48000 – (22800 editorial + 16500 author royalties) = $8700
20000 x $3.20 = $64000 – (22800 editorial + 22000 author royalties) = $19200
30000 x $3.20 = $96000 – (22800 editorial + 33000 author royalties) = $40200
Holding the author royalty per unit constant, because IPG said in its post that the author take would be about the same for lower-priced e-copies, we can see that there are some price points that don’t hold up under the wholesale model–unless more copies are sold. And my, look what happens when more copies are sold. Sell twice as many copies and go from in the negative to $19200. We’ve already proven with the Amazon best-selling Kindle books that we’ll buy more books if they’re cheaper; this is the beauty of the ebook format: ability to do volume sales without incurring extra costs. I’m not saying that books should start off at $6.40; there’s an art to retail, and part of that art is knowing that new books will sell at higher prices because of the rarity of the content being out there, which is why the whole hardback model has worked for so long. I am saying that there’s money to be had even with cheaper ebooks. Especially when you consider that, once a book has its editorial costs paid down, all of those profit numbers I just did are going to bump up. Books that have already done their initial runs could have their ebooks listed at a significantly lower cost and still be profitable through volume, with purchases from people who are just discovering the books, or who are willing to wait, which is a lot of us, and always has been a lot of us. The ebook phenomenon hasn’t really created any kind of new thing where people aren’t willing to pay for higher-priced books.
Let’s look at those numbers ($6.40 price point on wholesale model) again, after the editorial costs have been paid down:
10000 x $3.20 = $32000 – 11000 author royalties = $21000
15000 x $3.20 = $48000 – 16500 author royalties = $31500
20000 x $3.20 = $64000 – 22000 author royalties = $42000
30000 x $3.20 = $96000 – 33000 author royalties = $69000
For a book that’s migrated its way to the backlist, those figures aren’t bad at all. Selling the backlist at a lower price could net more than the publishers claim to make off of the initial trade paper print run, and I think lowering the price on that backlist would be the key to generating the volume necessary to see those numbers jump. So many books are published every year that I know I don’t get to keep up with all of the new books; it’s not like books have an expiration date past which they’re not “cool” anymore, so if I hear about a good book that was published awhile ago and it’s got a decent ebook price, I’ll probably pick it up. (Okay, some do have expiration dates, so to speak. A lot don’t, though.)
Then, there are classics, for which the publishers also don’t have to pay editors/marketing/etc and can put at an attractive price point, sit back, and make bank–but, those books that aren’t public domain are often the same $9.99 as a new book, and they don’t need to be, nor should they be to maximize publisher profit.
So, what does it all mean? For me, it means that, at the very least, publishers can seemingly make money off of the $9.99 price point, despite what they’ve been saying. It means that publishers could potentially make money if they charge less than $9.99, especially the heavy-hitting publishers who have author contracts with mega-bestsellers who will sell far more than 10000 books. It also means, to me, that there’s something very shady about this agency model vs. wholesaling controversy when publishers wholesale treebooks all the time. Why should ebooks be damned if they don’t get agency model prices, but trade paperbacks not? Ultimately, it means that I maintain my skepticism. While there are costs associated with editing, marketing, and so forth, publishers have not yet addressed to my satisfaction the ability to sell ebooks at lower prices to generate higher sales volumes, or even to sell ebooks at lower prices when editorial costs have been paid down (I mean, really–ten dollars for an ebook copy of Faulkner?) to increase sales volumes and profits. At this point, it really becomes a question of finding the right price point–not to maximize profit per unit sold, but to maximize volume and also maximize profitability. Find the sweet spot where we’ll buy the most volume of ebooks for the most money and price the books there.
What say you, readers, writers, and publishers alike? Too much math? Did I screw up the math somewhere? How do you feel about what the publishers are saying vs. what the numbers are saying? Let me know in the comments!
(photo courtesy of 401kcalculator.org)