Friday, February 5, 2010

The Price of Books

Writers are, unsurprisingly, good at crafting a narrative. As such, the writers have managed to steer the ship of the Amazon story much more effectively than either Amazon or Macmillain. It's no shock that this narrative favors Macmillan - almost everything about ebook pricing is hypothetical, but amazon not selling books is a direct threat to authors. Its reasonable that they favor the side that keeps selling their books.

Unfortunately, that's resulted in the sense that Amazon blinking was some kind of victory for authors[1], and that worries me. First and foremost, there's a big echo chamber in effect here: the book trade has definitely convinced the book trade that this story went a certain way, but that perception is not reflected quite so fervently in the public press. Sure, there are a few op-ed pieces from authors espousing the party line, but the actual news stories are a lot less invested.

And this leads to things like the declaration of the death of the $9.99 ebook, a declaration that is, I think, a bit presumptive. I've said before that I'm sympathetic to the cost of ebooks being non-zero, but the fact that book nerds grasp the fine points of the pricing enough to appreciate that does not mean that knowledge is widespread[2]. Here's an unfortunate reality: the readers who make up the ebook market are never going to be more saavy than they are today. It is currently a field full of early adopters, and that means there's a high proportion of knowledgeable folks. If the ebook market grows, its going to grow to the people who do not give a crap about the problems of production and distribution: they are people who will look at a product and simply decide if it is too expensive or not based on its own merits.

These people are going to be hard pressed to justify spending $15 on a computer file.

And the thing is, the publishers are more ok with this than not. If the whole ebook idea were to just die, they'd mostly be ok with that - lord knows they were happy to see it happen the first time. Sure, there's be the O'Reillys of the world who might soldier on, but for most big publishers, it's a big unknown that threatens to disrupt their already tenuous business model. Amazon and the kindle made it necessary for them to address the market, but if they can keep it priced high enough to stay a niche market, then that works well for them.

Of course, there's no real chance of that happening.

Book pricing doesn't follow the same rules that many other products have. If I want to buy a book, say Gladwell's "Blink", then it has a price set by the publisher. I might get a better or worse deal based on how steep a discount an individual reseller offers[3] but the base price of the book is fixed. There is no secondary company offering me the same book with a different cover for a lower price tag, or another company offering me the same book with extra bells and whistles for the same price. There's one source, and it dictates the price, without competition.[4]

So now these books are going to move to the ipad at a price set by the publisher, and it'll be high. This'll hurt the larger ebook market[5] and that's going to murder the kindle in the short run. The kindle is expensive, and reasonably priced books are part of its value proposition. The iPad, on the other hand, only has ebooks as an incidental aside, so their price has no part in its value proposition. That is to say, if ebooks are $15, then I might decide not to get a kindle because the total price is too high, but that same price point is unlikely to affect my purchase of an ipad because that's only tangential to why I'm making the purchase.

But here's the problem: The value of ebooks is arbitrary.

Consider for a moment a copy of "Blink". Now imagine a book of the same size filled entirely with thousands of lines of "row, Row, Row your boat". Now, there is a _cost_ difference in producing these two books (paying the write, editor and so on), but per the echo chamber above, no one outside the book trade really gives a crap about that. For the book buyer, looking at these on the shelf, there is a value difference between these two books that he's willing to put a price tag on, but it's always a question what that price point will be. If you price the real book for $15 and the junk book for $0.01, the buyer will balk. The junk book may be junk, but it's clearly worth more than a penny - clearly the difference is just markup. So you try to close that gap.

Now, there _is_ some price point at which the customer will be comfortable, but how your reach it can be rough. Remember, there's no competition, so the market can't really decide what your book is worth, except possibly in terms of other books (is Blink worth more or less than The Tipping Point?). The alternative is that you fix prices.

Now, publishers have been fixing prices forever, so they're ok with this, but that old model doesn't hold up as well online, partly because there's greater visibility, but partly because the feedback cycle is faster. Basically, you need to set a perceived reasonable price (as Apple did with 99 cent music tracks) or else you'll experience a race for the bottom as everyone involved moves to compete on price.

And this is why punting Amazon may ultimately hurt the publishers. The terms were not what they wanted, but Amazon had been very successfully creating a default perceived value for an ebook at 10 bucks. That seems like a terrible thing when you think you can get more than that for an ebook, but its going to look MUCH better when the price you can expect to sell for starts getting lower.

Am I confident that book prices will get driven lower than $10? Absolutely. They will get driven as low as they can while still turning a profit for the publishers[6] unless something artificially keeps them higher. Right now there are a lot of inefficiencies tied up in legacy business (y'know, actual books) but those will get trimmed down with time, technology and outsourcing and prices will reflect that[7] (again, unless they are artificially set in some fashion). Right now, book prices are something of a walled garden more than a marketplace, because the book trade wouldn't survive in its current form in a true market.[8]

I worry that publishers are making a decision in favor of short term gain and fear of change that is, ultimately, going to hurt themselves and the book trade immeasurably. That this may mean greater opportunity for small publishers with new ideas and greater flexibility is cold comfort at best.

(Of course, the reality is that the publishers are probably already colluding to create a fixed price structure on the ipad - it's not going to be a coincidence that their best-sellers are all identically priced - and the question is whether they can get away with it in such a visible place as out in the open on the internet?)

1 - Because authors will see so much more money under this deal...OH WAIT.

2 - Especially since the information out there is laced with a lot of self-serving misinformation.

3 - This, by the way, is part of why the "The publisher takes all the risk, the retailer exploits them!" argument is not as strong as it looks. Retailers need high margins so they can offer deep discounts. This is not a terribly reasonable model.

4 - This is, by the way, why Amazon's complaint about Macmillan's monopoly on their own products is not as silly as it sounds on the surface. It's into a great choice of words simply because it was so easily twisted into a joke, but this sort of exclusivity is actually a real problem, especially if you expect prices to be rational.

5 - Though that pain may mean more opportunity for the small players, and I'm good with that.

6 - The publishers, not the authors.

7 - I don't see that going great for authors, but I may be cynical.

8 - And there's a lot of pain associated with that. Publishers don't come of great in my perspective, but they also get checks to authors and put books on shelves, many of which are _not_ going to be the next best seller. While, as companies, they don't do this out of any generosity, the actual people involved tend to be real book lovers who have chosen this business because of their passion for it, not any sense that books will make you rich. If the book marketplace were to become rational, it would kill the midlist, at least for a while. That would suck immensely, and there's no guarantee that what would come next would be any real improvement.

14 comments:

  1. This, of course, exactly what happened in the music industry. Don't you think the music labels would have been much better off embracing the technology and driving the per-song price point to, say, $2 instead of letting Apple push it to $1. That ship has sailed.

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  2. It has, but at the same time, Apple's dollar price has reduced the pressure for 25 cent songs and 5 dollar CDs, so it's still better for the music industry than a free for all.

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  3. "If the book marketplace were to become rational, it would kill the midlist, at least for a while."

    Why wouldn't the midlist be *ideal* for ebooks? Audience exists but is smaller than for bestsellers, publishing costs (and risks) are less for ebook than for print. Maybe I'm thinking ahead of the pain the book publishers have yet to go through regarding entering the 21st century, but that strikes me as a rational model.

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  4. @sem You're absolutely right, but the transition's going to hurt, especially writers who currently make their living off it. The problem is that while it's easy to talk abotu this as an abstraction, there are enough real mortgages and grocery bills this hurts that I can't help but flinch.

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  5. True, but there are tech-driven paradigm shifts happening all over the economy. There are some very real comparisons between the Industrial Revolution and the Digital Revolution. Efficiencies affect value as well as costs, since they're related, and there are some big perception gaps between profit-as-margin and profit-as-percentage. It's easier to accept a $30 hardback when you know there are additional costs for material, making, shipping, warehousing, etc. (beyond advances and royalties), but much harder to accept $15-20 ebooks when those costs are (largely) irrelevant.

    I'm aware that in order to pay less for certain things, I and others will probably be *earning* less, if there isn't a profit margin to support our salaries. I understand if most people aren't.

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  6. I think what is really going to kill the price of ebooks is comparison to substitute products. Before, you would compare the price of books to a DVD. A hardcover was $15-30, but man, when you walk away you've got a freaking hardcover. It's a tangible physical thing. It sits on my shelf and chicks dig books. $15 bucks for what, a 100 meg computer file? Chicks can't dig a computer file! I can pay $10 or less and get a freaking multi-gig HD monstrosity of a file. And I know for a "fact" that movie had much higher costs. Mind you, that is total costs, the other fact those costs are spread over many many more people is too deep in the weeds for most people to care about. A wider audience is just not going to see the value. Especially not when you have magazines /giving/away electronic copies with their physical product.

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  7. Killing the midlist is exactly what the music business did a decade ago. And it does indeed suck. It sucks so badly that I dearly want to see the entire major-label record industry go down in flames so that something better can take it's place.

    Virtually all my spending on music is on independent self-releasing artists; some of them would have been in the midlist had it still existed.

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  8. @semoicity: I don't think Authors will make less money. They are the ones with an actual monopoly not the publishers. The value of your work has not decreased at all. I think it will be editors, typesetters, printers, execs and all the overhead in addition to writing that will see their salaries decrease. The cost of entry into the publishing industry has gone way down (hello evilhat!) making the value of huge publishing companies ever smaller (why am I jacking up the price of my books so you can keep your last century presses running again?)

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  9. Good post, though it doesn't include the important point (a point also skipped in stories by the AP and others) that what the pubs are pushing as part of the agency model is a system where only brand new eBooks (and not even all of those) are going to be $14.99 when they come up, and then get cheaper as time goes on, moving toward a low point of $5.99.

    In other words, it'll roughly model the current structure where you can choose to pay $25 for hardcover when it comes out, or wait and get the $8 mass market paperback.

    What the publishers are in part trying to avoid here is a Walmart-like scenario where Amazon eventually comes to them and says that, because Kindle owners won't pay more than $9.99 for an eBook, Amazon needs to get a bigger discount from the publisher. If eBooks cost the same no matter when they're purchased, it'll keep Amazon from using cheaper eBooks to grow the Kindle's base to the point where they can throw their weight around to that extent.

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  10. @semoicity: The cost of the physical book (printing and so on) was estimated in a Money Magazine article from last spring as being only about 10% the cover price for the big publishers, and less than that for the really big print runs. Most of the money is spent on the editor, copyeditor, book designer, cover artist, support staff (legal, accounting, sales, etc), and, of course, the writer.

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  11. @Michael Your right, of course, that the ultimate goal is a more nuanced price structure, like the one that currently exists for print books, but the reason I don't put a lot of weight on that is that I think it underscores the problem. Digital pricing is its own beast, and trying to treat it the same way as print, just without paper, is not going to solve any problems.

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  12. @semioticity: It's difficult for a publisher to make money off a midlist author in the traditional publishing regime. Most barely break even, many don't even do that.

    This in turn means it's difficult for the midlist author to get the support from the publisher that their work probably deserves. Afterall, the publisher is going to invest in those titles expected to give a greater return.

    Ebooks won't change this basic dynamic. In fact, given the models that have been floated, it will probably make things much worse, as the publisher will actually get an even greater return per unit, hence increasing the pressure to invest their money there.

    And altering this dynamic, to focus on epublication first, and physical product second (probably through POD or direct sales over the internet), will threaten the profit margins on the more expensive to produce best-sellers (which really do rely, at the moment at least), on being able to put the physical product in bookstores and chain and department stores). So the midlist has to be sold at the same price, or the whole house of cards comes tumbling down.

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  13. I know there's a lot more to it and my grasp of economics is tenuous, but won't the price of ebooks eventually equalize normally, assuming that the publishers don't do something to kill it first?
    While Macmillain does have a monopoly on their own books, if another large publisher undercuts Mac's price by a dollar, doesn't that put pressure on Macmillain to drop their prices. Sure, the titles are different and you won't be able to get X from the other guy, but odds are the other guy has something you'll like as well, right? If given the choice between two equally cool things, I'll generally choose the cheaper first (depending on the amount of money floating in my pocket). This would set up an indirect pricing war, where the value of the medium is at stake, rather than the value of the work.
    Maybe things won't work that way. I think that pricing a hardcover differently than a paperback makes sense, because the production values are higher (it's their choice to do the HC first). However, the cost of a movie ticket is mostly comparable to a new DVD, if you figure in the change in use (you can assume you're going to watch it at least twice, or with someone else, there are extras, etc.) Purchasing an album off itunes is also about the same as buying the CD in the store.
    Maybe I'm completely off base...

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  14. "(Of course, the reality is that the publishers are probably already colluding to create a fixed price structure on the ipad - it's not going to be a coincidence that their best-sellers are all identically priced - and the question is whether they can get away with it in such a visible place as out in the open on the internet?)"
    From what I've read, this whole hoopla started because 5 of the 6 big houses have already negotiated these rates with Apple for the iPad. (Random House is still working theirs out)
    As for whether the argument gets slanted one way or the other, I agree - from what I've read, inside the publishing bubble, everything favors Macmillan, but the handling of the situation from both parties is probably helping with that. Both of John Sargent's letters that he sent as advertisements in Publisher's Lunch were reasoned and sounded forward looking. He came off as the white knight, asking to charge between 5.99 and 14.99 so that they can release concurrently with hardcovers rather than making people with ereaders wait to get lower prices. Amazon didn't like this idea, and he offered to let them keep the 9.99, but the titles would have to be heavily windowed. He got back to NY and found all of the buy bottons gone. After that, Amazon's response, which was buried in a Kindle forum, well after they removed the buy buttons, about Macmillan having a monopoly on their own titles just seemed kind of sad.

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