Why e-books aren't cheaper

We've all heard the rant. With e-books, there's no paper, printing, transportation, and so forth. So why should an e-book still cost $9.99 (typical for Kindle) or even more?

The idea of e-books being cheaper makes a lot of intuitive sense. If everything you physically hold in your hand and everything it took to deliver that physical good to your hand can be converted to a few megabytes worth of electrons, surely the cost of the book must be dramatically lower than a typical hardcover--and the price should reflect that fact.

The problem is that the costs aren't nearly as much lower as you might believe. Here's one breakdown from Money magazine for a hardcover bestseller by way of Scott Laming of BookFinder.com Journal:

Based on a list price of $27.95

$3.55 - Pre-production - This amount covers editors, graphic designers, and the like
$2.83 - Printing - Ink, glue, paper, etc
$2.00 - Marketing - Book tour, NYT Book Review ad, printing and shipping galleys to journalists
$2.80 - Wholesaler - The take of the middlemen who handle distribution for publishers
$4.19 - Author Royalties - A bestseller like (John) Grisham will net about 15% in royalties, lesser known authors get less. Also the author will be paying a slice of this pie piece to his agent, publicist, etc.

This leaves $12.58, Money magazine calls this the profit margin for the retailer, however, when was the last time you saw a bestselling novel sold at its cover price.

One way to look at this is to look at the percentage of the list price that printing represents. That's 10 percent--plus at least a chunk of the wholesaler line item. So let's call it 20 percent in all.

But, as noted, given that books generally sell at a discount off list, I find it more intuitive to look at this the other way. Start at zero and add cost and profit line items. In the example, the typical volume retailer is often making far less than the $12.58 figure would suggest. A 40 percent discount brings it down to only $1.11; hardcover bestsellers are a sort of loss-leader for retailers.

Pre-production. Other things being the same, there's no reason this goes down with an e-book. Arguably it's a bit lower if something is sold solely as an e-book--perhaps a bit less design work and proofing related specifically to the physical nature of a book--but it's actually likely a bit higher if we're talking about having both physical and digital versions--as would be the typical case today.

Now some, such as blogger Aaronchua, argue that this just shows that traditional publishers "have not changed their operating structure to leverage on the new economics brought on by the Web."

However, as noted in discussion of the prior piece, these functions are not just costly overhead. "After the book's in the publishing house, it is usually reviewed by like up to 5 editors who give their opinion before it's handed over to one editor who they believe is the best for it. You then get an editor, who through multiple revisions helps the author get the book to a better standard and quite often to more closely resemble the author's original idea."

Now, perhaps the whole process is too heavyweight. But how many of us have read a book and thought to ourselves that "it really needed an editor." Most of us, I'd say. You can skimp here but the results often show it.

Marketing. Again, there's no inherent reason why the dollar amount changes. Many aspects of the marketing process probably change if we posit an all-digital world. But social media and other forms of viral promotion are not a panacea that magically replaces book tours, professional publicity work, and so forth. Sure, you don't need to do any of this but you don't need to sell many books either.

Profits. Let's be generous and cap the costs there. In practice, there are going to be some costs related to digital delivery that someone is going to have to shoulder along the line, but ignore that.

If we're going to sell the book for $9.99 net of any discounts, that leaves us with $4.44 to split between the retailer and the author. Compare that to $4.19 for the author in the printed book example and something between about $1 and $10 for the retailer. So a $9.99 e-book in this example leaves less money after costs than the hardcover does.

This may be made up by higher volumes to some degree. However, as Tim O'Reilly noted in a 2007 post:

I think that the idea that there's sufficient unmet demand to justify radical price cuts is totally wrongheaded. Unlike music, which is quickly consumed (a song takes 3 to 4 minutes to listen to, and price elasticity does have an impact on whether you try a new song or listen to an old one again), many types of books require a substantial time commitment, and having more books available more cheaply doesn't mean any more books read. Regular readers already often have huge piles of unread books, as we end up buying more than we have time for. Time, not price, is the limiting factor.

The economics of selling back-catalogs may also be different. Pre-production costs are, almost by definition, fixed. They're incurred before the first book can go out the door. Marketing is also primarily a fixed advance cost. (Although the size of budgets will be tuned to expected sales--unknown authors with no track record shouldn't expect massive advertising and publicity campaigns.)

So once those costs have been incurred--and hopefully recouped--in more or less the usual way through the first couple of years of a book's life, it may make sense to offer a discounted digital edition given that it doesn't incur the cost overhead associated with lower volume "long tail" sales.

(In principle, you could argue that the same logic applies to the pricing of digital editions at any time in a book's lifecycle. However, in practice, a $5 e-book of a new release would cannibalize the more profitable print edition.)

I know this post went into a lot of detail, but when you're talking about business models and pricing, it is important to actually run the numbers. One can dispute fundamental assumptions behind those numbers of course, but at least they give a starting point.

In this case, they show that--if you want the same level of professional preparation and promotion associated with a typical printed book--the $9.99 e-book price that a lot of people grumble about is probably pretty near the floor.

[Jagadeesh Venugopal]

I agree with Tim O'Reilly's assertion that the major "expense" in a book is the time spent to read it. Unless you're talking pulp fiction, reading and assimilating a nonfiction book (to the point where it makes a useful difference in your life) takes weeks, if not months.

I'd much rather pay a little extra for a well written book that meets my needs, rather than have to suffer through something that was slapped together to meet an arbitrary price target. Because I like to consume the information in multiple formats, what would be ideal is a book + non-DRM PDF combo for one price that is slightly above the cost of the printed book. This is exactly what O'Reilly is doing.

[kwnewton]

I don't think people are really grumbling about paying $9.99 for a new release that's published in hardback. If you notice, it's only Amazon that's able to offer that price. I think book buyers are grumbling when the price rises above $9.99, or when publishers try to say with a straight face that ebooks are absolutely not any cheaper to produce than printed books. Since new authors are told repeatedly that they cannot expect to get published if their book is longer than 100,000 words BECAUSE IT'S TOO EXPENSIVE to print lengthy books, than that suggests that paper and ink do, in fact have a cost.

There's also the question of economy of scale. With a print book, reprinting is cheaper by a good bit than the initial print run, but with ebooks, there is no need to guess how many copies to produce or go to multiple printing. Get it right once and then just keep cranking them out.

I believe it will get better once publishers figure out where the market is.

[greggstutts]

Good post.

My only objection is the cost break-down from Money Magazine. Most publishing contracts I've seen base royalties on a percentage of "net proceeds" received by the publisher. So take the $27.95 retail price and discount it about 50% (the discount the distributor might get). That's going to cut the royalty expense in half.

Of course, I've never dealt with an author of Grisham's standing, so maybe he's getting 15% of full retail. More power to him. I'm just not sure that's typical for most authors.

Pre-production costs on a unit basis are also a direct function of the size of the print run. Higher print run = lower unit cost. Second print run = little or no pre-production costs.

So, as you've said, once fixed costs are recovered, an e-version could be offered at a lower price.

Regardless, the content-purchaser's expectations are changing. If publishers don't get ahead of the curve, they may become irrelevant. Just as publishers can now bypass the store and sell directly to the consumer, there's a day coming when content creators will bypass the publisher and the store to sell directly to the consumer.

Actually, we're already there.

[ghaff]

Thanks for the info. I agree that publishers will need to adapt. A lot of the services that they provide today (editing, promotion, filtering, etc.) are going to still be needed by most non-hobbyist authors. But one can certainly imagine different--and probably lighterweight--publishing organizations optimized for an environment that doesn't have large up-front print runs.

[fazalmajid]

My chief gripe with ebooks is not the price but the annoying DRM restrictions. Since an ebook is not resellable and cannot be given away to friends or family, its value to me is lower and should be priced accordingly.

[SkydiveGuy]

I love my Kindle. that said...
I DO NOT like the idea that I pay $9.99 for a book and I am not able to resell it, loan it out, have a backup on my PC.
If the price difference is not too much more, I tend to buy the print version that I can actually OWN OUTRIGHT and not just own the RIGHTS TO READ IT.
Although this article was very good and very informative, I am not a fan of not being able to OWN what I BUY.

[davidwb]

All of what you say may be true but it doesn't explain some of the pricing I see for Kindle books. If the publisher expects me to deliver my book in Word format and all subsequent editing takes place on that file, how much additional work is required to turn my Word document into a Kindle eBook? Assuming it is a work of fiction with no illustrations, a macro should be able to handle the task. So where is the additional cost in creating my Kindle eBook? If a paperback version is selling for $8 how can the Kindle version be priced higher? It required to printing, no transportation, and no warehousing. When DRM limits the rights of the buyer, how can a publisher realistically expect him to pay top dollar for the book? And how can a publisher or author dare to cry foul about a pirated eBook when they don't make a legal eBook available concurrently with the print version?

Sorry - for all the logical explanation your article does, I still cannot see the justification for charging $15 for an eBook crippled with DRM and especially not once the paperbook has been released.

[andyguevara]

This is a good breakdown of the economics. Do they still hold true for college textbooks? I'd like to see the $500 price tag on textbooks go down!

As an active member of the Amazon Boycott Anything over 9.99 discussion boards (416 people strong), I decided to 'see how much it would cost' to take advantage of turning my writing into an eBook.

As a former paramedic, I know how to handle sudden accidents and illness, but when it comes to computer knowledge (writing code, etc), I usually suffer tremendous chest pain and brain freeze.
I went forth despite the pain, uploaded a mystery I'd published independently in 2003, and within hours, readers were buying.

Moved by that experience and combined with a former friendship I had with a VP of one of the major publishing houses and the inside knowledge he gave me (I still have his emails), I wrote a short story specifically for the eBook market ABOUT the greed of publishers - and what might happen if they actually listen to consumers for once. Lark Frumpert - A Tale of Publishing Greed took two days to write and upload.

And lastly, I recently uploaded "Go Arsonist," a handbook that encourages people to burn down old school thinking, ignite their dreams, and inspire innovation.

My point here is that if a former paramedic that's always been a writer on the side, can shoot her own covers (free), upload her own documents (free) with NO other fees associated with my experiments, then to hear a Main Street Publisher whine that it's 'just as expensive as producing a hardback book' is totally, completely, ridiculous.

Finally, publishers will point out "but readers pay for the ?CONTENT" - really? How many books do you own that A) Were full of errors and B) So poorly written/crafted that you tossed it in your recycle bin? And it was produced from the bowels of a Main Street Publisher.

Main Street Publishers are trying their best to spin their own story about eBooks and production, and my work may not be perfect, but guess what, at least I'm trying - and the justification of inflated eBook prices - we aint buying.

Madison "Girl Arsonist" McGraw

[mp lee]

your arguments might be a whole lot more convincing if paperbacks weren't already sold for less than $9.99.

[richard993]

Your arguments and calculations are way off. Printing and distribution costs are far larger than the figures that you are quoting especially for 1) books that are more than 500 pages such as IT books, 2) books that are printed overseas and that are shipped overseas, 3) books that need to be held in a warehouse for a couple days before being sold.
The logistics involved including lost revenue due to damaged goods (damaged in transit, storm, moisture, natural degration of paper over time, etc...), stolen goods, cost for managing inventory, etc...etc... have been way oversimplified by you. More than 50% of a book is the cost of storing the book (rental costs), shipping it, printing it, stock taking, cost of robotics used for moving/retreiving inventory for larger warehouses, and many other costs associated with physical goods that do not apply to electronic distribution such as paying for people for picking and packing the books for shipping.
Furthermore, we should also consider the benefit of being able to resell a physical book (which means that you can reclaim some of the costs after you are done reading the book, something you can't do with electronic books).
Your justifications for overcharging customers for e-books don't stand. Book sellers such as Amazon and the publishers are absolutely milking customers for all it's worth when it comes to e-books and they currently have a monopoly through some exclusive deals for some titles. You have absolutely no clue what happens in this industry nor do you have any clue what is involved with managing physical goods, because if you did, you would know that moving from physical to electronic distribution would save you a lot of money. Look at the software industry, most distributions are now done via internet downloads rather than packaged goods. If it was more profitable to provide physical goods, the software industry would not have moved to an electronic distribution model.

[gerrrg]

I think the question is wrong Forget the best-selling novels. Let's look at the whole gamut.

"Foundation ActionScript 3.0 with Flash CS3 and Flex" in both digital and paperback have the same list price.
"Google SketchUp 7 For Dummies" in both digital and paperback have the same list price.
"The Graphic Standards Guide to Architectural Finishes" in digital format is discounted a whopping 3.6% from the print edition, based on list prices.

The list is long.

There should AT LEAST be a discounted list price, based upon non-printing costs. And retailers should be able to save money on warehouse storage space as well as shelf space. The pricing should have a large disparity in favor of a digital edition; maybe not a 50% difference, but surely they shouldn't be equal.