Ebook economics Part 2: The publisher’s dilemma

Wed May 18 2011 22:37:54 GMT+1000 (AEST)

In the last post we looked at why eBooks make more money faster for publishers compared to a traditional codex, or pBook.  This time we’ll look at why it’s not quite as simple as all that.

The first thing to note is that in these posts I’m looking at book publishing from the point of view of the publisher, not the author.  That’s because I’m trying to examine the economics behind what format books are published in, not whether or how they are written.  Authors are of course important and like to get paid, but some writing and authorship will still occur without monetary payment - the same can not be said for publishing.

At the moment, publishing companies are entering the eBook market by printing titles in multiple formats, rather than having a line of titles which are solely published in electronically.  There are some exceptions in specialty markets like reference (although most of these have turned into databases rather than eBooks) and textbooks, but for fiction and popular non-fiction titles it tends to be multi-format.

Given what I showed in the previous post, this might seem odd on the face of it.  Why bother shipping all those dead trees around when you can make more money from eBooks?  The problem, as we noted at the beginning of this discussion, some people are quite attached to having their books printed out and stuck together in codexes.  The big question is - how many?

We can look at this question in two different ways - with a fixed number, or a fixed ratio.

Last time we looked at a graph showing the relative profit from publishing the same book as a $15 eBook or a $25 pBook.  Even at $10 per copy less we saw that publishers will make more money earlier from titles that are published in eBook alone - but that’s assuming that all of the potential pBook sales become eBook sales.  What happens if there are some hold-outs?  Well, it depends both on how many pBook loyalists there are and how many there are in comparison to eBook buyers.

Publishing in both formats lowers risk

When publishers put a title out in both pBook and eBook formats, they can spread some of the risk, because the basic overheads are the same for both formats.  This means that publishing in both formats can result in making a profit with less hardcopies and less electronic copies than either format could sustain alone.  The graph below shows what happens when we publish a fixed number of pBooks (1000) in combination with various numbers of eBooks of the same title:

The numbers along the x axis represent eBook sales, whilst the orange line represents the profit that would be earned on the same number of pBooks if they were published separately.

What you see here is that when publishing both formats together, we can break even at 1,771 eBooks in combination with 1,000 pBooks - marginally ahead of the 2,813 pBooks we would have to sell to break even publishing only in hardcopy.  To break even publishing only in eBook, we need to sell 2,100 eBooks.  This allows nervous publishers to leverage the efficiencies of eBook publishing, as well as the extra sales resulting from the lower price, without abandoning their traditional customers.

Once eBooks become popular enough, pBooks lower profits

Something interesting happens when we get to 5,500 eBook sales.  Between 1,771 and 5,500 eBook sales, the total profit in combination with our 1000 pBook sales is higher than either format would be on their own.  After 5,500 eBooks, however, the publisher would actually make more money without publishing pBooks - even if none of those 1,000 pBook sales became eBook sales.

Now let’s look at the same graph against the percentage of the total taken up by eBooks:

We can see here that the point at which eBook-only makes more money than both combined is where 85% of readers are buying the eBook version rather than the pBook.  This model is based on a static base of 1000 pBook purchasers, but what happens when we keep the ratio static but increase the overall number of sales?

....But not always

I’ve had a look at various combinations, and it seems that for any realistic number of sales (ie less than 50,000), the lowest ratio possible is around 80% eBook sales.  What happens at 80%, however, is very interesting:

We see here that at the point sales go into profit, it would be more profitable to only publish eBooks.  However, after 3000 eBooks, if we maintain the 80% ratio we find that it becomes more profitable to continue to publish in both formats, as long as the 80% ratio is  maintained.

Confused?  I don’t blame you.

The numbers here are based on just one cost/price model, but while the specifics will change, the general principle will not.  Essentially eBooks have a chicken and egg problem.  Publishers can make more money selling ebooks and ditching the printing presses if they can get a high ratio of their customers to make the switch.  But until then, they’ll make more money publishing in both formats than in either alone - except in some circumstances when they won’t!  This is one of the reasons why publishers are experimenting with eBooks, but not really pushing them hard.

The problem for those who are wedded to the ‘romance of print’ is that hardcopy is the least profitable way to publish books, and as readers become more comfortable with eBooks, the proportion of hardcopy readers will drop further and further - especially as eBook and eReader prices continue to drop  Eventually, it won’t be enough to sustain hardcopy, except as luxury products.  So while you’re all arguing about the romance of print, librarians are already trying to work out how we deal with a mass movement to electronic publishing and storage.  But that’s another story...