E-book Economics 101

 The e-book is turning the  book business upside down. No one in publishing  seems to be talking about anything else. Manufacturing costs, retail prices, competition, author royalties, the future of the physical bookstore, the future of the novel, enhanced books, book reader technology, eye strain, how to read an e-book on the beach, are commercial publishers out-dated dinosaurs; these are but a few of the subjects that are generating the most agonizing soul searching in book publishing. Nobody knows how these things will ultimately sort themselves out. The changes are just coming too fast.

  In this post I am   going to analyze the economics of publishing and compare the cost of publishing a hardback book to that of the e-book. I’m an agent, so I have an ax to grind.  It looks like the bottom line is that book publishers stand to  make more money on e-books and authors will make less.  

 For this post, I am using information that I took from an article in The New York Times. Here is the link to the article.

First let’s look at the costs of publishing a traditional hardback. The numbers  in The New York Times article  were calculated for a  hardback with a $26 suggested  retail price. (Remember that booksellers can charge any price they want. And a lot of bestsellers are discounted to the book buyer.  Here is the breakdown.

Amount paid to publisher by bookseller: $13.00

Printing, warehousing, shipping: $  3.25

Author Royalty:  $   3.90

Design, editorial, typesetting:  $      .80

 Marketing:  $  1.00

 Profit before overhead:  $4.05

I am not entirely pleased by the robustness of this analysis. It neither accounts for all of the expenses nor all of the income associated with a particular book.  But it is a good indicator of the relative costs of publishing a title.

 What is an E-book?

 If you don’t know the answer to this question, what have you been doing for the last two years? And if you are reading this on a Kindle, skip to the next section.  E-books are like iTunes. And, in fact, the  iTune division of Apple will be managing  the Apple e-book store. New technology for the e-book changes almost daily. As of (let’s see now) yesterday I believe, you can even  download e-books onto your iPhones. The largest selling e-book reader is the Kindle. But the Apple iPad is moving up fast as of this writing. There is also the Sony Reader, the Nook, the Kobo reader and new brands popping every month.  Readers are beginning to get sold at the big box stores and should be a popular item this Christmas. It is estimated that by the end of the year, there will be over 10,000,000 readers sold.

 In 2009, e-books accounted for about 4% of unit trade book sales, but sales are increasing exponentially.  E-book sales  in 2010 are up over 150% from previous year’s sales. Unit sales of  cloth and paper books have been decreasing.  Amazon.com claims that they are now selling more Kindle Editions than traditional cloth titles. Most major publishers though are showing less dramatic e-book sales. But they are reporting that 10%  or more of  bestselling new titles are e-books.

 The advent of the iPad creates a suitable platform for visual books as well. People are already experimenting with books that incorporate multimedia integration. The first “enhanced” e-book was published last July.  Perhaps soon you will be able to buy a cookbook that includes film demonstrations by the author. Or book group editions with film clips of interviews with the author.

 The e-book is a perfect fit for our gadget-obsessed world.

 And what are the costs of publishing an e-book?

 Let’s go back to The New York Times article that we discussed above on the cost of publishing a book. There are some substantial savings to the publisher on e-books. No manufacturing costs, no warehousing costs, no shipping and receiving, no returns. Sweet!

 Like all other things e-book, the economic model has been changing protean-like, and no one in publishing can predict what it will look like in a month, let alone in a year. Let’s take a look at the $26.00 hardbound book from the example above. Currently publishers are giving book lovers a break and selling e-books for about half  the price of the hardback. Sometimes Amazon is selling these books even lower and at a loss in order to gain market share. About 90% of all e-books are currently being sold by Amazon. And Amazon is hoping to keep it that way, in spite of fierce competition from Apple.  Google recently w rolled out its e-book store and is selling in a variety of formats. (Amazon only sells Kindle editions that only can be read on the Kindle reader). Independent stores have linked up with Google and are selling e-books on their sites as well.   

 There are several different systems of selling e-books, but let’s keep it simple and look at the sales for books from most major publishers. So here are the costs and the profits:

 Price to the consumer:  $12.99

Cost paid to publisher by bookseller: $ 9.09

Author royalty:  $ 2.27

Digitization, typesetting, editing :  $   .50

Marketing:  $    .78

 Profit before overhead: $   5.54

 The first and most astonishing thing you will notice is the hit that author royalties have taken on the e-book economic model. Authors will receive a royalty of $3.90 on the hardback vs. $2.27 on an e-book.  (Actually that may not be the first thing you notice, but agents and authors are understandably  concerned about this. “Livid” might be a better characterization.) Note also that even with consumer prices being half of the list price of a traditional book, publishers stand to make considerably more money on each sale, because of negligible manufacturing and distribution costs.

A lot of people think that e-books don’t cost anything so they should have a price that reflects this.  Amazon seems to be promoting this idea for their   own reasons. But remember e-books still have costs for royalties, marketing, and editorial. There are a number of Internet gurus who think that “information wants to be free”. But most writers feel that their work is worth something and they should be paid for the ten years that they toiled on their novel, for instance.

 There are some other, as yet, unquantifiable factors that would tend to make e-books an even better deal for publishers. E-books will not generate costly returns of unsold books from the bookseller. They are sold to consumers non-returnable. You can’t even give it away to a friend. And you can’t sell it to used book stores. My gadget -obsessed brother, Ken Ross, (check out his company, Expertceo.com)   now only reads books on his Kindle. He claims that he buys many more books than before, because of the ease of purchase. If he gets bored with what he is reading, he just hits the button for a new book and moves on. That is what publishers are hoping for – more readers like Ken. And if Ken’s buying patterns are anything to go by, reports of the death of the  book  and of book publishing will have been greatly exaggerated.




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11 Responses to “E-book Economics 101”

  1. michael roloff Says:

    as an long time editor and ex-publisher now writer scholar still translator i would never read an e-book. i wonder whether e-books will actually increase the sale of titles? any evidence of that? because they are half the price and evidently more convenient for lots of people. i do see quite a few folks reading them at my coffee shops here in seattle..


    • andyrossagency Says:

      Thanks for weighing in Michael. I think there have been some surveys about this that appeared in Publishers Weekly. But I was too lazy to try to find them and all of the data on reading habits are flawed.

      So my comment was anecdotal based on a very unrepresentative sample, my brother, ken.

      • andyrossagency Says:

        Thanks Christie. We wrote about this a few times in Ask the Agent. Publishers are concerned that Amazon has the power to determine what the consumer thinks is the inherent value of a book. Publishers are also concerned that the price will be so low that people will abandon paper books altogether.

        Apparently Amazon’s statistics about selling more kindle editions than hardbacks is true. But you are right. A huge amount of all e-books are Kindles that are sold only from Amazon. Publishers are saying that about 10% of all best seller sales are on e-book editions. But it is growing fast.

  2. christie olson day Says:

    Great post, Andy. 2 things:
    1. “A lot of people think that e-books don’t cost anything so they should have a price that reflects this. Amazon seems to be promoting this idea for their own reasons.” What could those reasons be? Seriously, I’ve had a real “WTF?” feeling about Amazon’s pricing strategy for awhile. Are they trying to put publishers out of business and make editing a crowd-sourcing activity?
    2. My little statistics pet peeve: when Amazon says they’re “selling more Kindle editions than traditional books” they never highlight the fact that they have 100% market share on Kindle editions but, what, 17% market share on paper books. They’re brilliant about publicizing misleading numbers.

  3. Catharine Says:

    Don’t forget, Andy, that Kindle ebooks can also be read on iPads just by downloading the Kindle app onto your iPad.

  4. rita Says:

    Your post was petrified to open my horizons to know more

  5. David Gerstel Says:

    Andy, why would marketing be less for an ebook? Why would typesetting and editing be less, as your numbers indicate?
    I am an author with my own publishing operation. I just published a book written, edited, designed, and packaged for printing-on-demand entirely on a computer and via the web. It seems to me my editorial, typesetting, and marketing costs would not have dropped had I first put my book out as an e-book. They would have been identical.
    To introduce another issue, let me begin by saying I may yet put out my new book as an e-book. By doing so, I can drop the cost to readers into the single digits even as I significantly raise my royalty per sale, already much greater than what a corporate publisher would pay me. If that is true for me, it is true for countless other authors, and for that reason E-book publishing may make author/publishing irresistible for authors who have the sort of “platform” you describe in another post, a bit of business moxie, a modest amount of capital they can put at risk, and a willingness to climb the steep learning curve it takes to set up your own professional grade publishing operation (a very different proposition than the sort of amateurish self-publishing that relies on so-called author services). For such authors, setting up their own operations can result in their royalty rates and gross royalties greatly increasing rather than getting chopped as e-books take over.
    P.S. — I have read a number of your posts. They are clear, lively, insightful, helpful, and sometimes moving. Thanks.

    • andyrossagency Says:

      Dave, I can’t answer all those questions precisely. I was using numbers from a New York Times article that were provided by publishing executives. I have some other problems with the analysis too, but I need to simplify in order to keep it clear.

      One of the reasons that marketing would be less for ebooks is that a fair amt of money is spend on paying stores to put books in prominent places or on display. And those costs could be as high as .25% per book. I can’t think of why editorial costs would be different from ebooks. There might be some differences in design though.

      The other questions you raise are pretty interesting and probably too complicated to address here. Self-published books have a hard time getting any attention. Most of them aren’t very good. And the ones that are good can easily get lost in the ocean of mediocrity. We can talk about it some more though.

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