Tuesday, February 09, 2010

The eBook Pricing Debacle -- c.anne.gardner

As most of you know, I have been very vocal about the ebook price debacle over the last several weeks. And frankly, and this is only one podpeep’s opinion here, I don’t feel bad for the publishing houses at all, and I always feel bad for the authors. Publishing commercialized art and now they are reaping the rewards of that. They tried to make rock-stars out of writers and are now getting the same kick in the teeth that the music industry felt a few years ago when Mp3s got popular. Oh, they try to spin it claiming that the retailers are devaluing the author’s work, but if an ebook price that is less than the paperback price is devaluing the work, well, publishers have been devaluing their authors for years then. I’ll explain later in the article.

First let talk about business models. Under the current publishing model, it costs X amount to produce a hardback book. Of course, this varies from book to book depending on length and other fiddly packaging and marketing costs. The publisher knows what it costs to make the book, and so when they set the retail price for said book, it is an inflated number based on cost plus expected profit margin. The reason for this is because the retailers who will be placing orders for that book generally want a wholesale discount. Makes sense, because if the retailer buys the stock from the publisher at retail cost, they are then forced to sell it at retail cost and yet make nothing on the deal to cover their own expenses such as warehousing, shipping, and infrastructure expenses while still making a profit for their shareholders. If the publisher gives a 50% discount off the retail price, they still make more than what the product actually cost them. In this scenario, as with most retail models, the retailer then has the right to set their own sale price to the customer. This is a standard retail business model. They can’t sell to the consumer at their cost, because they need more than their discounted price from the publisher, and they can’t charge more than the publisher's retail price point: who would buy anything greater than retail. So, most retailers will often discount the publisher’s retail price but not to the extent they received from the publisher. A savvy retailer rarely ever charges full retail price because they know customers like the idea that they are getting a bargain. More customers means more sales and more sales means more profit because the customer is likely to become faithful to the store and purchase items that may not discounted in the future.

Moving along to the new model: In an email to agents this evening, Hachette Book Group USA CEO David Young announced a shift to an agency model for eBook pricing.

Here's an excerpt: "There are many advantages to the agency model, for our authors, retailers, consumers, and publishers. It allows Hachette to make pricing decisions that are rational and reflect the value of our authors' works. In the long run this will enable Hachette to continue to invest in and nurture authors' careers--from major blockbusters to new voices. Without this investment in our authors, the diversity of books available to consumers will contract, as will the diversity of retailers, and our literary culture will suffer." And he added this point about eBook releases: "Another great benefit to our consumers is that we intend to release HBG e-books simultaneously with the hardcover (or first format print edition)." The article then states: This makes Hachette a valuable ally for Macmillan in their price feud with Amazon (AMZN). In a paid advertisement about the Amazon debate, Macmillan CEO John Sargent defended the agency model: "Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digital media businesses). The price will be set the price for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time."

Ok … so under the new model for ebooks, retailers are no longer retailers. I can see where that makes sense to some degree: they don’t have to buy stock, but they still have to deal with shipping (via network) and infrastructure costs, and now, under the new model, instead of receiving a 50% wholesale discount, which they in turn can pass along to consumer thus increasing their sales and profit margin, they now only get 30% profit on the retail cost, which they cannot adjust to market conditions or pass along to the consumer. Of course, the spin on that is that Amazon will make more profit, but that is not entirely true. The inflated retail cost might actually decrease book sales, and if that happens, everyone takes a hit. And here is where I want to talk about Dynamic Pricing. This is something the authors, the publishers, and the consumer should be able to live with. First a bit of pricing commentary:

Madeline McIntosh from Random house "sees the need to maintain control over pricing but admits that publishers have very little pricing knowledge, primarily because they don’t have a relationship with the end user."

No Shit! $15.00 bucks for an ebook clearly shows they have very little pricing knowledge, but hey, you know who does have pricing knowledge and a relationship with the end user: the friggin’ retailers like Amazon you idiots.

Over on Teleread Chris Meadows outlines some of the disparity nicely: "So, why would publishers NOT want Amazon to find the optimal profit-maximizing price? Because, like many entrenched media companies, they have massive legacy cost structures that don’t support selling books at, say $6 wholesale. They offer many unreasonable arguments against this: books are “worth” more, authors won’t make enough money, it’s bad for the industry, etc. These are not economic arguments, but are meant to maintain the status quo economics as long as possible. And it’s ultimately bad for them."

And David Neal says, "It is difficult enough to put a price on something that is commonly traded, handed over, shared, and used to prop up table legs, never mind protect the rights of its original author. So how do you value something that can't be shared, can't be re-sold, and is unsuitable for making improvised furniture...adjustments? $14.99 sounds like a lot of money for an e-book to us, so who wins when the publisher sets its prices high and the bookstores complain that this alienates readers? It can’t be the authors, the booksellers, the readers, or the literary agents. So who does that leave? Ah yes, the publishers."

Stripping Amazon of its $9.99 price point while jacking up the retail price on the ebook version isn’t going to win anyone any customers. And don’t start whining about devaluing the author’s work. That statement is pure publisher spin so your authors will think you have their best interest in mind, nothing more. If a hardback book, as an example, is priced $26.99 retail, and the subsequent paperback is priced $15.99, regardless of windowing, is the publishing company saying the author’s words are worth less? Of course not. Between the two editions nothing has changed as far as content, editorial services, cover design, etc. So why is one priced lower than the other if the content is exactly the same? In the simplest of terms, the packaging has changed. Paperbacks are cheaper to produce, and because they have a lower cost associated with them the retail price point is adjusted accordingly. But the dynamic price does something even more beneficial here: people who couldn’t or wouldn’t pay the hardback price are generally more willing and able to pay the paperback price. More readers find the adjusted price economical, and so more books are sold and authors gain more readers. So, just because someone is able to buy an ereader does not mean they want to be robbed for their content. Most people buy an ereader because they don’t want to pay for the packaging. They just want the words, that’s all. So it stands to reason that if the publishing house can reduce the retail price from hardback to paperback because the packaging is cheaper, then ebooks should be dynamically priced less than the paperback because there is no packaging. We all know ebook conversion is cheap. Now if the publishing house wants to opt out of the windowing scenario and release the ebook on the same day as the hardback and charge the full retail price for both, well, it’s idiocy. But if the ebook price drops dynamically over time to what it should be -- less than the paperback -- then I am ok with that. I will wait. If some schnook wants to pay full retail for a virtual book, then that’s up to them. I at least want a nicely bound book to show for the money. Anyway, to illustrate my point here, I purchased a mainstream book over the weekend for my Sony ereader. I bought Drood by Dan Simmons. I have wanted to read this for a while. The book has been out for a year already, but I don’t buy new releases, and I rarely buy hardback editions of any book. I usually wait for paperback, and then I buy it from whoever has the best price. Sometimes I pay full retail but most often I don’t. Now I chose Dan Simmons’ book because he is an author who warranted a mainstream hardback contract, so we can see the full windowing and dynamic pricing thing in action. Again, we have to get out of the content-centric mindset here. We are not talking about content and what an author’s words are worth, we are talking strictly about packaging here, so I wanted to use this book as an example because it is a mainstream author, mass-market fiction, and is already a year old.

  • Hardback retail release price: $26.99 published Feb 2009
  • Paperback retail release price: $15.99 published Feb 2010

Ok, so the paperback retail price is 40.75% less than the hardback price. Is the publisher saying that the author’s words are worth less? Of course not, they are saying that the paperback is a cheaper product, that’s all. It’s cheaper to produce and uses cheaper materials. So as a consumer, I am not getting all the fancy packaging that comes with the hardback, so it, again, stands to reason, I wouldn’t be charged for gilded pages if I didn’t get gilded pages. However, here is where things get a bit scary when it comes to ebook pricing. Logic doesn’t enter into the scenario here and it’s no wonder why consumers are pissed:

Ebook price for Dan Simmons Drood:

  • Amazon Kindle: $9.71
  • B&N $9.71
  • Sony: $18.89
  • Fictionwise: $26.99 or if you are in the “club” $22.94
  • Kobo Books: $12.59

Both Amazon and B&N are locked in the battle of the ereaders here. Marketplace competition has always affected pricing models. It eliminates price fixing and offers customers choice outside of a monopoly. Amazon and B&N are content companies first and foremost, and they want people to buy their reader and lock into their proprietary format and content, so both of them having the lowest and equal price makes sense. Sony on the other hand, well, they are a hardware company, not a content company. Their readers use the open format .epub, and so they knew by doing this customers wouldn’t necessarily buy from the Sony store, even if it’s as convenient as using iTunes. They relied on the open format to attract more hardware buyers, not content pricing. They don’t care about the content and hope consumers will just be lazy. Apple will run into the same situation, so it is to the publishers and the Agent’s – Apple here -- benefit to price fix at retail. If there are no bargains to be had, customers will just buy from their hardware provider. This is bad news for the consumer, and bad news for content only providers.

Now I don’t have a Kindle and I don’t have a Nook, so I couldn’t take advantage of that nice $9.71 price point, so I wandered over to Fictionwise – owned by B&N now – and had a coronary. Fictionwise is exclusively a content provider, much like Kobo, so I was expecting something roughly in the 9.99 range. Well, I almost put my PC through the wall when I saw they were charging full hardback retail price for a virtual book that is already a year old. After I regained consciousness, I ended up purchasing the book over at Kobo for $12.59. It is a 774 page book, so even though it wasn’t $9.99, it still seemed fair to me if one takes into account the Dynamic Pricing Model, which is based on “packaging.” It’s less than the paperback retail price of $15.99 – about 18% cheaper -- and that is what matters to me. We are not buying a physical copy of the book, so don’t charge us for one. We know ebooks are cheaper to make. I would have liked to see the same discounting percentage held over time though, which at the 40.75% would have looked something like this: Hardback $26.99, Paperback $15.99, and ebook $9.50. But as long as the ebook costs noticeably less than the paperback edition, publishers have some wiggle room before the consumer gets outraged.

Perhaps the best summary of this situation was written by Steven Pearlstein at the Washington Post, who recognizes that this is a technological transformation, and while it may be messy in the interim, the end results should be quite positive: While markets have their flaws, over the long run they are good at executing these technological transformations.... Reports of the death of book publishing, like those of music publishing and newspaper publishing, are greatly exaggerated. Business models will change, companies will come and go, and people will lose their jobs. But at the end of the process, there will be fewer people who will be paid higher incomes to produce a wider array of products at lower prices. There's a word for that -- progress -- and it's exciting to see it unfold right in front of us.

In the end, an accessibly priced book means more readers. More readers mean more profit for authors, retailers, and publishers. The business model has to change. We are not devaluing the art here, as you can see by the examples. We are devaluing the packaging. That’s all it amounts to folks. As I said over on Ditchwalk: I don’t know if $9.99 is the right number. It may not be for all ebooks, but whatever percentage is used to adjust this so-called Dynamic Pricing, it had better be consistent. As for me, I will not pay $14.99 for an ebook because that is a paperback price. I will only purchase an ebook if its retail price is 15-20% discounted off the paperback retail price. It's not worth it to purchase a virtual book at a physical book price. So, I'll just buy the paperback and then sell it into the used secondary market. Publishers went through this already when mass-market or grocery store paperbacks came into being by saying it would cannibalize the sales of other editions, and you know what, it didn’t. Trying the same tactic now isn’t going to work any better. And if you are trying to kill ebooks in order to preserve print, take a long hard look at the future. A straight to digital contract is a viable option, and some authors -- short fiction authors -- would benefit. Even the movie industry was able to make that work with straight to DVD.

Edited to Add: And don't worry publishers ... you can still make money hand over fist here by putting all your backlisted titles into ebook format. Those are almost 100% profit, and I am sure the authors would love to see new life breathed into their languishing titles. But then again, the authors could do that themselves if their rights have reverted, now couldn't they????

Cheryl Anne Gardner


DED said...

Nicely done.

I've noticed that a lot of authors have sided with Macmillan against Amazon, especially after seeing their works get de-listed from Amazon's website. Their argument (which they fiercely adhere to) seems to be that the publisher needs to remain profitable because they do so much for the author (editing, cover art, marketing, etc). But anyone who has self-pubbed knows that the majority of the costs are in the manufacturing of the book. Once the ms has been edited and formatted, there aren't any further costs involved with the eBook. Are eBook profits supposed to make up for print losses? It's not like the authors are going to be getting better royalties.

Emily Veinglory: said...

I don't think you need to side with one or the other. the enemey of your enemy is sometimes also your enemy.

A publisher who is not self-publishing must pay the author, editor, artist and typesetter. Thsu the majority of their costs actually are not in production.

I would also note that retail stores simply do not set recommended retail price. If the publisher sets it too high, the readers will leave them cold and they will lose sales.

I would not side with the publisher regardless. But I would never side with Amazon and their creeping policy of "vertical integration".

Cheryl Anne Gardner said...

Both Amazon and Macmillan were guilty of attempted price fixing. They are both in the wrong. You can neither side with one or the other. Consumers notoriously side with choice and bargains.

We also know that manufacturing, distribution, warehousing, etc is only one portion of the cost of a physical book, but that is the cost that can be used to adjust against retail without losing profit. Retailers need to be allowed flexibility with respect to discounting against suggested retail. That's Econ 101. They also have warehousing, distribution, and infrastructure costs outside of the publisher. They have a profit margin to maintain too.

That is why I agree with the Dynamic Pricing Model: Hardcover costs the most, then paperback, then mass-market paperback, then ebook. Each book of course will be slightly different just like they are now.

The consumer is entitlted to choice, so they can decide which product best suits their needs, their expectations, and their wallet.

The consumer will choose the retailer that gives them the most choice. It's as simple as that. Hell, I went with a Sony ereader because I wanted to be able to buy epubs from anywhere and whoever had the best price. I didn't want to be locked into a format, a price point, or a content provider.

The Podler said...

It's not worth it to purchase a virtual book at a physical book price.

Especailly a virtual book that you don't really own. You can't print portions of any Kindle book and Amazon has the right to take back your book from your Kindle.

Cheryl Anne Gardner said...

Exactly, if I am paying the premium suggested retail price, I had better be able to read the damn thing how I want and where I want, and if I have multiple devices I want to be able to transfer it, depending on my situation. Sometimes I read on my PC and sometimes I read on the ereader. If I am working on a review book, I do a bit of both.

At least with Itunes, I can burn a CD to keep in my car or at work if I want to.

Chris Gerrib said...

This lady thinks we're seeing a repeat of the record industry debacle. She points out that, as a result, records became even more hit-focused than they were before.

There is nothing magical about $9.99, and as far as I am concerned, the wholesaler should get to set the price. It's their product. If the retailer doesn't like the price, don't sell it. If the market says it's too high, they won't buy it.

Lastly, the physical production of the book is the least expensive part of publishing. If you're willing to order a few thousand titles, trade paperbacks run $1 each.

Cheryl Anne Gardner said...

I agree Chris, 9.99 may not be the right price for every book, but no one is saying the manufacturer, in this case the publisher, can't set their own MSRP. They can, but the retailer should also have the right to discount, as it suits their business model, or not stock the product at all, and the consumer has the right to decide and shop for the best price.

I forget where I saw the number quoted, but an industry higher up said the average production cost for a book was 12.5%. If course production does not included warehousing and distribution costs such as shipping. Some books cost more depending on how fancy the packaging is, hardbacks obviously cost more than paperbacks, and print run also affects the cost. That's why all ebooks can't be 9.99. The pricing has to be dynamic but it also has to reasonable.

I think the publishers are missing some of the bigger picture though by not recognizing the new revenue streams that will open up because of the digital evolution. I made comment in my post about that today.

Cheryl Anne Gardner said...

I really like what that woman said in her article here:

The introduction of digital downloads could almost be seen as a desperate measure on the part of consumers to listen to music in an unrestricted, un-mandated, un-stuffed-down-their-throats way. When you add to this the rise of social networking as the distribution means of the present/future, and word of mouth as the primary marketing tool, I think we have an incredibly hopeful and optimistic situation. For music. Not for music executives.

Publishing execs, good luck to you! I wish you all the fortitude necessary to tear down and rebuild your own walls.
So Chris, I think this evolution too will be good for books and for authors. The same thing will happen here that happened in music. Of course, it won't necessarily be good for the deep pocketed publishing execs, but for art, it's going to be a good thing. Especially for the nimble Indie artists and small presses.