Nathan Bransford is a literary agent turned author. Dial will be publishing his first children’s book, “Jakob Wonderbar and the Cosmic Space Kapow,” in May. And he’s now writing for CNET. So his insider’s knowledge of the book business and publishing industry is substantial.
In a recent analysis, Bransford explains why e-books can list at higher prices than print books, despite our mental model that e-books should always be substantially cheaper.
The reason? Simple economics. Perhaps too simple.
Publishers typically receive about 50% of the cover price of a book in the wholesale model. The retailer then prices the book within that margin, anywhere from 0% up. So discounting the book to customers eats into their 50% but leaves the publisher’s share unchanged. Even at a 30% retail discount, a retailer can still make 20%, but they’re taking that discount out of their share, not the publisher’s.
E-books brought in an element of uncertainty and opened up another front in an ongoing price war. Amazon was in the midst of a battle with big retailers over print books, with both sides going so far as to sell their print books at a loss in order to entice customers to buy other things with them. Then, Amazon caught itself selling e-books at a loss in order to gain marketshare for the Kindle. For customers, books of all types were very affordable.
But once the agency model was put in place (a model the European Union is currently investigating to see if it violates anti-cartel laws there), publishers could set their own price, and the mathematics of old once again factored into consumer prices. Amazon’s loss-leader on e-books ended, while the loss-leader on print often continued.
So when a reader of Bransford’s blog noticed that “The Girl Who Kicked the Hornet’s Nest” was $0.10 more expensive as an e-book than as a print book, it caused some confusion. Here’s the explanation:
Publisher: $8.39 (70% of e-book price)
Amazon: $3.60 (30% of e-book price)
Publisher: $13.95 (50% of $27.95 list price)
Amazon: – $2.06 (customer price minus $13.95 paid to publisher)
Bransford’s economic analysis is over-simplified to illustrate a basic point — the wholesale model provides a better gross cut of the cover price than the e-book. However, it also represents a potentially illogical line of thinking, namely that the gross margin for print wafts down to the bottom line unimpeded by things like returns for physical books, printing and paper costs, and other expenses that take a bite on the way down, dramatically decreasing the net income for print.
It raises for me a question — are publishers concerned about income or are they more comfortable preserving the status quo? Certainly, there’s a tension here that clearer mathematics might settle. As Bransford summarizes the possible thinking of book executives:
Publishers make more money on the hardcover sale. . . . this also has the effect of slowing down the rate e-book adoption or steering people toward the print editions. . . . I’m guessing they’re probably okay with that. They have print operations to consider and bookstores that they’d like to survive as long as possible. As long as it’s still primarily a print world (and it is), publishers have many rational incentives to protect their print sales.
I’d argue with Bransford’s assertion that the publisher’s incentives are predominantly rational — if they’re based on revenues instead of net income, they’re questionable; if they’re based on existing contracts and obligations, they’re not rational but institutionalized, a difference worth noting; if they’re based on current sales proportions (print selling the majority of books), they’re rational but only for the time being; and if they’re habituated, they’re certainly not rational but comfortable. And by pricing their e-books against the revenue model of print instead of the income model of print, publishers are creating a pricing practice that has consumers justifiably confused, as Bransford notes:
But the biggest problem . . . is that it creates a great deal of consumer confusion and angst. It doesn’t make any intuitive sense for e-books to cost more than paper. By keeping e-book prices high, it opens up a huge opportunity for the 99-cent Kindle bestsellers to exploit. Also: As the music industry found out, annoy digital consumers at your peril.
The customer expectation that e = free or e = cheap — created largely during the early days of Kindle market penetration — strikes me as a major conceptual hurdle we’re in the midst of overcoming, through more expensive iPad apps, the realization (as Joe Esposito talked about yesterday) that free can be costly, and other pricing changes based on the fact that print is less able to carry the full costs of a hybrid print/online publishing operation. However, until dedicated e-readers become free (as some are projecting), consumers expect to make up for the expense of an e-reader by getting e-books at a lower price, adding to the pricing hurdle.
Publishers are certainly doing better math (getting to net income, not just comparing revenues), and they should be factoring in their desire for sales into authors and series that can create loyalty over the long haul, along with the fact that e-readers tend to be owned by their most loyal customers.
The agency model can work for e-readers, but with print a loss-leader for more and more mainstream titles selling through large retail outlets, looking only at the revenue line can be misleading for both publishers and consumers alike.