In response to my first post on eBooks, I received some comments on Facebook along the lines of ‘I’ll never buy an eBook, what about the romance of print?’
Unfortunately for hardcopy romantics, economics is a stronger force than sentiment. This is the first in a series of posts attempting to explain why I think eBooks will eventually cannibalise the pBook market before destroying the old publishing financial model.
The first thing it is necessary to understand is that under the pBook model, most books that are written are never published. Preparing and printing a book is expensive. It needs to be written, edited, designed, marketed, printed and distributed before you even have a chance to buy it from your local bookshop. To recoup the cost of all this, a certain number of copies need to be sold just to ensure the publisher does not lose the money they have invested. This is made worse for publishers by the ‘sale or return’ policy of big publishers, whereby bookshops can return any unsold copies to the publisher. If the publisher thinks a particular manuscript is less likely to recoup their investment than another, it will be rejected. (Jasper Fforde presents an amusing idea that these end up in the 'Well of Lost Plots', which first features in his novel, Lost in a good book). Even given this, most titles end up losing money, or at best break even in the bargain bin.
Let’s now look more closely at the costs involved in publishing. At this point I should note that I’m a librarian, not a publisher, so the following should be considered as a conceptual model, rather than a real-life example. Some of the figures can be quibbled over, but as with many economic models it is the trend and general principle that is important here, not really the actual figures.
Cost breakdowns are held close by publishing companies, and vary depending on the quality of the paper and printing, how much marketing is done and so on, but roughly speaking you can expect something like:
10% - author
40% - publisher
10% - distributor
40% - retailer
So if you’re selling a paperback for the typical price in Australia it breaks down, per copy, as:
If you’ve ever wondered how Book Depository can afford to sell books cheaply and then give you free shipping as well, it should now be obvious - 40% of the retail price is usually swallowed up by the overheads and profits of book stores.
For a title by a new author the average publisher might hope to sell around 3000 copies, and make around 2.5% of the cover price in profit. This means that publishing a print run of 3000 pBooks will cost our publisher $28,125, and they hope to sell all of them for a net profit of $1,875. Not exactly a princely sum, but we’re talking about the typical title, not a Robert Ludlum blockbuster.
Now let’s look at the cost of publishing an eBook. The standard royalty for eBooks is 25%:
25% - author
75% - publisher
0% - distributor
0% - retailer
Of course, the publisher now has to distribute and sell the eBook online. Publishers at the moment generally sell eBooks at the same price as their hardcopy versions, claiming that the costs of publishing eBooks are the same or even higher than that of traditional pBooks. For argument’s sake, let’s agree that it costs the same to get an eBook ready for printing and sale as it does a pBook, and that there will then be an additional cost to distribute and sell it. How much should this extra be?
Typically, about 10% of the sticker price (or 25% of the publisher’s cut) will be for the cost of the actual printing, and another 10% will be for distribution. If we take $6.88 per copy for pre-printing publication costs, that still leaves us with $2.50 in printing and $2.50 in distribution costs we don’t have to pay. But of course, we haven’t set up an online store yet, and that’s going to cost us money.
This is a small outfit, and we’re just modelling here, so let’s say it’s going to cost $100,000 to set up our online eBook store. If we want to distribute our 3000 copies this way it’s going to cost way more than $2.50 per copy - it will actually cost us $33.33 per copy to distribute (the observant among you will have noticed this is more than the sticker price). But of course we wouldn’t set up an online store with only one book for sale, and this is where electronic distribution starts to become cheaper than physical distribution. Our $100,000 sales gateway allows us to distribute far more than 3000 ebooks, and unlike physical distribution, the cost per copy drops as we sell more titles across the publisher’s whole catalogue, over time. Even a small publisher is probably about to go out of business if they can’t sell at least 100,000 books in a couple of years across their whole catalogue. At this quantum, our eBooks only cost $1 each, compared to the $2.50 per copy it costs to freight those heavy pBooks.
Physical book distribution costs don’t really scale well unless you’ve got so many copies that you need to start using shipping containers for each title, but let’s be generous and say that for every 5000 copies we can save 1% more on costs. Comparing that to eBook distribution we see parity at 55,000 copies, and advantage to the eBooks after that.
To give us a figure to use, however, let’s say it costs $1.00 on top of the non-printing costs for a publisher to break even on distributing and selling an eBook.
This leaves a $4,500 gap in publishing costs between 3000 eBooks and 3000 pBooks: $23,625 to break-even as a publisher of 3000 eBooks versus $28,125 for 3000 physical books.
The important factor here, however, is the number of copies required to break even. For a traditional pBook under our example the number of sales required for the publisher to break even is around 2,800, whereas for eBooks it is only around 1,250.
So if you’re a publisher who thinks there are only 1,500 potential readers of a book you might publish it as a eBook, but never as a pBook.
But will there really be 1,500 readers for a $25 eBook? Probably not. The evidence so far suggests that most people refuse to pay the same price for an eBook that they will pay for a pBook of the same title. Regardless of publishers’ claims that the cost of production is very similar, the perceived value of an eBook is less. How much less? Well, some eBooks are selling right now for $0.99, but I’ll be talking about them in a future post. For the moment, let’s just assume we need to discount the eBook by a similar margin as that between hardbacks and paperbacks. A $10 gap will make the eBook cost $15 and the pBook $25. Our profitability/break-even graph now looks like this:
The eBook still costs the same to produce, because making more copies doesn’t actually cost us much more (apart from the nominal $1 for distribution we talked about earlier). When we sell the eBook for $15, we need to sell 2100 copies to break even. This is still less than the pBook, however, which of course still needs to sell 2,800 copies to break even.
All of this means that publishers are likely to start publishing new authors in eBook first to test the market - because the number of sales required to make a profit is less for eBooks once you’re publishing enough of them in aggregate. If they get a runaway success, or at least an author that doesn’t lose them money, a pBook edition or subsequent title may follow.
So this is the reason that publishers have started selling eBooks - put simply, they’ll make more money selling less books. But in the next two installments I’ll explain why they haven’t simply dropped hardcopy altogether (yet), why your preference for hardcopy won’t make any difference in the long run, and why I think ultimately eBooks will kill the publishing business.