Friday, July 9, 2010

The Problems with Pricing the Digital Book

I think the recording industry made a major mistake when they moved to the CD format.

Their mistake was in pricing.  LPs, just before they went into hibernation, sold for $8 - $9 for a single disc LP.  Double record sets were usually around $15 -- less than twice the price of a single disc LP.  When CDs first came out they sold for $15 or more.  There was a lot of talk at the time about the cost eventually coming down, in part because we quickly learned that the cost of making the physical compact disc was actually far less than the cost of pressing a vinyl disc.

However, the recording industry found that people were quite willing to pay $15 per CD.  So the price stayed.

Overnight, the recording industry all but doubled the price for the same collection of music.  They presented it on a smaller, lesser expensive media that was more easily damaged.  All too frequently in those early days, simply converted the old tapes they had from the original LP pressings to CD without spending any time/money on cleaning up the sound. 

It did not surprise me at all that Napster was so widely accepted by music lovers.

Now I'm not going to say that if CD prices had been lower Napster would not have taken off the way it did.  I will say, however, I believe the recording industry was short-sighted in their pricing scheme.*

All of which brings me to the pricing of e-books.

Last year the CFO at the well-respected University Press where I work did a in-house series on the Business of Publishing.  He used one of our better selling titles as his example, allowing us to chart the costs associated with a book we all knew to be a success for our press.  The numbers were impressive -- the costs of moving a book from the initial idea stage through Acquisitions, through the Advance for the writers**, though Manuscript Editing, through Production and into Marketing were high.  Very high.  Keep in mind, we're a mid-sized, non-profit publishing house and we're pretty good at keeping our costs down.

This title had been out for several months and was heading into a second printing.  On paper, however, it still hadn't turned a profit.

A force more powerful than the bottom line, however, is perception.  And here's where the e-Book comes in.

On the one hand, we're talking about content here.  On the other, we're talking about the presentation of the content.  The difference is that of format: bound pages of printed paper for a traditional book (I refuse to use the term p-Book.  Please) versus an e-Reader screen displaying black pixels.

From an early age we are taught that books are valuable.  On an abstract level we know that with a traditional, bound book, the reader has the sense that someone had to create this book.  They had to typeset, print, bind, pack, ship and shelve this very physical thing in their hands.

Things, however, have no value in and of themselves.  We assign a value to them and then have to come to an agreement on what that value is if we want to trade them for other things -- things that we have also assigned a value to by a spoken or unspoken mutual agreement. 

We are now in a period of time where the Publishing Industry, the Distributors and the Consumers are trying to, awkwardly, explain their perceptions of what the value of an e-Book is.

Part of the problem, I think, is that consumers and certain distributors have one understanding of what an e-Book is, while Publishers have a separate understanding.

The consumer starts off from a position of having already spent $200+ for their e-Reader   After that pricey investment, they're looking for content -- content that comes in the same patterns of on-screen pixels (i.e. letters forming words forming sentences) that they already see and read on their computer screens all day long for free.  Except the content on their e-Readers is usually made up of just black pixels, where on their computers they can at least get treated to color every now and then.

Most people accept that there is an added value to the content provided by a publishing house.  They don't begrudge the publisher some sort of profit.  However, it's clear from the public outcry over Kindle pricing, that the perceived value of digital books is not equal to the print version.  Customers make the argument that there are printing costs, no shipping costs, and no warehousing costs.  These savings should, they believe, be passed along to the consumer.

The catch is, however, all of those up-front costs to get a book to completed content ready to be output makes up roughly 90% of the cost to produce a finished book†.  On top of that, you still have to convert the content into the many, different e-Reader formats (sadly, there is no Save As... Kindle option in Word or OpenOffice.††

Some publishers are saying "full hardback price" while others say "full paperback price."  (They're looking to make back their investment on shepherding a title to the finished stage as well as to help balance the Profit and Loss sheet for their entire season's list of books)  Apple says $12.99 - $14.99 while Amazon wants authors to agree to $9.99. (Their primary interest is in selling the hardware and then offering a cheap stream for content)  Joe Konrath, over at "A Newbie's Guide to Publishing" says he thinks e-Books should sell for $2.99.  (Joe is a self-published author of at least eight books.  To his credit, he puts his money where his mouth is and sells his titles for Kindle for $2.99.  And he made $10,000 last month doing so)

So, who wins?

To paraphrase one of my former grad professors, Douglas Gomery, whoever controls the channels of distribution, controls the industry.  This worked in the days Hollywood's Studio System when the studios owned the movie stars, the film studios and the movie houses.  In the nineties this fell apart somewhat when Napster


* My long-held theory is if Apple fell victim to this same problem.  Had Apple had managed to get their manufacturing costs down and their pricing closer to the PC market (once IBM sold off cloning rights) we would be living in a world where Macs dominate the world and PCs would be struggling to hold on to a share of the marketplace.

** Advances are, admittedly, fairly rare in the world of academic publishing.

† A friend of mine who has worked in the Marketing Department of several major publishing houses in NYC puts this figure as high as 95%.

†† Yes, I know both can be parsed into XML but that still doesn't get you all the way to .epub or .mobi.


  1. My two cents:

    1) I predict that cell phones will become the preferred way of reading a book. Yes, the screens are small, but they're ubiquitous, and you don't have to bother carrying (or investing in) a dedicated e-reader if you can read on the device you already won't leave home without.

    2) Chapter 1 is free; beyond that is 25 cents a chapter -- the "peep show" paradigm to selling electronic books. Won't work for all kinds of books, but for it will for plenty of mass-market novels. Writers will adapt to the demands of the marketing format. Dickens wrote great literature for magazines, in monthly installments.

    3) New written works won't go away. Storytellers made a living before Gutenberg came along, and they'll manage somehow after the computer revolution. (The editors, I'm not so sure of.) There will be more books to choose from, at a lower average quality, as the barriers to entry drop for new writers. Everything written before today will still be around; Project Gutenberg and Google Books will only expand. Publishers' back catalogues will return "in print", since it will cost so little to make an old book available again electronically. With expanded catalogues, most/many publishers will probably figure out a way to make money from all those books. The demand for written stories will remain, and people will continue to be willing to spend a certain fraction of their income on them.

    4) There will continue to be a market for high-quality work. Like Apple and its computers and electronic devices, some people will always be willing to pay a premium for quality. (Good news for editors!)

    5) Not surprisingly, publishers will have to compete with everything else a person can do with free time and a cellphone/e-reader/tablet computer in hand: read news, read gossip websites, listen to music, talk to friends, use Facebook, etc. This is nothing new, really. With a ubiquitous device out there, publishers can only make it their business to compete for the device user's attention and dollars.

    6) I'm glad I'm not in the publishing business, because times, they are a-changing. Ask me my opinion again in ten years.

    -- A

  2. my 2¢ in response to your 2¢:

    1) I predict that cell phones will become the preferred way of reading a book.

    The problem I see with the Kindle & Nook is that they are, in Alton Brown (of "Good Eats" fame), unitaskers. They may do their one thing fairly well, but as crowded as our lives are with stuff, I don't think we have much tolerance for unitaskers.

    Smartphones, with their ability to be used as a telephone, mini-computer to run applications, web browsers and be, in general, web-enabled, interactive devices, are the wave of the future. However, their screens are still too small. In general, I think you're right; in practicality, I think it's going to take the development of a new display technology before it comes about.

    Once the mysterious, secretive THEY who create such things, develop a foldable and/or expandable digital display monitor -- and, thus, allow the iPhone's display to quickly become that of the iPad -- we'll remain in a position of long-term Transition.

    2) Chapter 1 is free; beyond that is 25 cents a chapter...Dickens wrote great literature for magazines, in monthly installments.

    I'm not sure this approach will work. Amazon already offers free samples for Kindle readers on most of their titles, but it's either an all-or-nothing proposition when it comes to buying the book.

    At the well-respected University Press where I spend my 40-waking-hours, we've considered the pay-per-chapter concept. For us, it makes better sense in that many of the scholarly works we publish might be used in course packs for university classes.

    3) ...There will be more books to choose from, at a lower average quality, as the barriers to entry drop for new writers.

    Amazon just announced a for-Kindle app that you can drop an HTML file into and it will convert the content into Amazon's proprietary Kindle format file. This will, undoubtedly, make a wider variety of content available for the Kindle.

    However, quality will, I think, continue to be a major issue. Published reading material has largely been a controlled substance in that publishers only produce those manuscripts that meet a certain criteria. While that criteria is now largely "Will it make a buck?" there has always been some emphasis no good (regardless of how relative the term) writing.

    With the floodgates open and no gatekeepers to separate the good from the bad and/or the mediocre, I worry that book buying for e-books might become like cable TV. Sure, it's great to live in an age where there are 250+ channels to select from, but if 99% of those have content I'm not interested in, what good are they? I suspect (as you state in your #4) that people will largely continue to make most of their e-book purchases based on whether the book is traditionally published or not.