Thursday, May 3, 2012

The Brave New World of Ebooks, Especially the Basic Arithmetic No Journalists Seem to Feel Like Doing When Reporting on the Collusion Lawsuit

So I guess I've got another entirely too long blog post about the book industry in me, or perhaps more accurately, stuff has happened in the book world and if I try to keep all of this inside, you'll find me dead in a bathtub from an aneurism several days from now.

I'll get to ebooks prices in general and the role of self-published ebooks in publishing, but first the big news is that the Department of Justice, who I guess had finished up with all the bankers responsible for the crash of 2008, the possible gouging of the US government by the no-bid contractors in the wars in Iraq and Afghanistan (hey, you guys remember when Haliburton did such a bad job installing the showers, a soldier actually died taking one), and well, everything else going on in the world, has filed an anti-trust lawsuit alleging collusion to fix ebook prices by Apple and five major publishers. There has been a lot of reporting on this, but most of that reporting has left out some basic, well, arithmetic that explains the publishers actions, while also continuing to ignore the fact that ebooks are NOT substantially less to produce than print books. (At least, not at first, but more on that later.) So, here we go.

The Lawsuit and the Simple Arithmetic

The thrust of this lawsuit is that those five publisher decided together on what's called the “agency model” of ebooks pricing and decided together on what to price their ebooks in that model. In an “agency model” for ebooks sales the retailer, Amazon, Apple, Google (and through them Porter Square Books), Barnes & Noble, etc, acts as an “agent” for the publisher and receives a commission, usually 30% of the price of the ebook as set by the publisher. This is different from the traditional model, in which the publisher receives about 50% of the cover price and the retailer is able to sell the ebook for whatever price they choose.

When MacMillan and Apple first explored the agency option, Amazon was selling ebooks at dramatically low prices, often at $9.99-$4.99 for books that were retailing around $24.95. The result is that in the first few years of ebooks, Amazon represented about 90% of the ebooks market. (Hmmm, naw, it can't be a monopoly.) There were acceptable reasons for their early market dominance; they were the first to really push digital retail, while having the first successful dedicated digital reading device, but that doesn't account for 90%. Amazon was using the price flexibility of the traditional model to use predatory pricing to gain complete control of the ebooks market, and they were damn close to doing it.

It's usually about here, articles drop the ball. Some will point out that the publishers actually LOST money on the agency model (as with the traditional model they were still getting their 50% of $24.95 no matter what Amazon was selling them for) in order to foster a more competitive retail environment, but they never show the numbers behind the agency model's pricing that explains the existential risk to the publishing industry posed by an Amazon monopoly able to dictate ebooks discount terms. So, let's get ready to Math!


Let's take your average new hardcover. Priced at $25.99, publisher on average get 50% of the cover price of a print book, or $12.99 for every print book sold. (And from that pay the janitors, the utility bills, the secretaries, the editors, the publicists, the cover designers, and, if there's any left, the writers, who dedicated whatever free time they could scrounge from however they paid their bills, to pour the very substance of their humanity onto notebook pages and hard-drives, for years and sometimes for decades, until finally they were able to participate in one of the most important cultural actions humanity has ever had; the reading of a book, but you, know, they're not as important as investment bankers who...Sorry. Back to the math.) Right now, agency ebooks of hardcover editions are generally priced at $12.99. With agency titles publishers receive 70% of every copy sold, $9.09. So, every time an agency ebook sale replaces a hardcover sale, meaning every time someone who would have bought the hardcover buys the ebook, the publisher loses $3.90. That is a little bit more than the saved overhead ebooks provide, but given that ebooks at about this price also create sales, meaning people who were not planning on buying the hardcover at all end up buying the ebook, this is a sustainable and perhaps even profitable price point. Really a win-win. Customers who want a cheaper option have it and the industry in general is sustained for those customers who want the more expensive print version. Just like with the prices of print books, which are all pretty much the same across publishers, the arithmetic of publishing generated this number. Nobody needed to collude to come up with it.

And right now, agency paperbacks are also sustainable. For a $14.99 paperback, the publisher gets $7.70 for every print copy sold. Most agency titles in paperback are sold at $9.99 as ebooks, netting the publisher $6.99 for every ebook sold. Again an initial loss, but one that is likely canceled out by new sales and saved overhead.

But the ebooks market could get unsustainable real fast. For example, if that $12.99 price point is shifted by market pressure to $9.99, (and by market pressure I mean, Amazon pressure) publishers will lose $6.00 for every hardcover replacement, meaning the ebooks would have to create about two new sales for every replacement. It's possible, but an awfully risky business model.

Now imagine if Amazon gets control of enough of the ebooks market that they can dictate discount terms to publishers. They were once at 90% of the market and if they are able to sell at dramatic losses again, they might regain that level. I don't think they will raise their ebook prices to consumers, because low prices (sustained by terrible working conditions at their warehouses, not paying state sales tax, and a few ethical and innovative business practices just to spice things up) are kind of their thing. However, they will pressure publishers into giving them profitable discounts based on those price points. Instead of selling those ebooks for a loss or for a 30% commission, they will demand a traditional discount, around 50% of the price they have decided on. Here's what the math says about that.

In that scenario publishers would get $6.50 for every ebook sold at $12.99, meaning they would lose $6.49 for every ebook that replaces a hardcover sale. If Amazon decides that price is $9.99, the publisher would get $5.00 and lose $7.99. For producing the exact same quality product, making the exact same investments and putting in the exact same amount of labor, because a big box store wanted control of everything, the publisher loses $7.99 per unit.

Yes, ebooks buyers buy lots of print and ebooks and yes the cheaper ebooks prices do create sales, but given that most publishers are barely getting by anyway, those loses would put many if not most out of business. (Just to get this out of my head, where are all these filthy rich greedy publishing professionals buying yachts on the backs of downtrodden ebooks buyers? I mean, the best editor in the world makes tons less than a shitty investment bank executive, but it's ebook prices that are the problem. Aneurism prevention) Of course, there's no guarantee Amazon will pursue this particular doomsday model, but at every step on the range of possibility towards that, publishers (mostly the small publishers that make sure books stay interesting) will be left behind, either by going out of business, or by not being sold on Amazon. And nothing Amazon can do, no matter how big it gets, will be able to replace the diversity of voices, ideas, and books, coming out of traditional publishing large and small.

The agency model, was not about profit. It was about survival. It was about monopoly prevention, something the Department of Justice is supposed to deal with. By creating price parity, those publishers diversified the ebooks retail market so that now Amazon only controls about 60% of it. Still pretty monopolostic if you ask me, but it is not so powerful that it can dictate the terms as above. This means that ebooks can find a sustainable market price, one that funds all of the work that goes into producing a book and is a rational reflection of buyers' desire to save money. It also allowed independent bookstores to get in the game, which meant that customers who wanted ebooks and to shop local, now can.

But, Wait, There's More, and It's Math-Free

However, for all of you price-centric buyers, I think there is a possibility of seeing the $4.99 ebook if publishing is stabilized and if you are patient. Here's how.

Think of publishers as taking out a loan on every book they publish; a loan that consists of the advance to the writers, the salaries for everyone else who works on the book like the various editors, graphic designers, publicists, etc, and the general upkeep of the business. Essentially, every book, print or e, puts the publisher in debt a certain amount. When the hardcover edition is released at $25.99, 100% of that debt remains. That's one of the reasons why hardcovers are about $10 more than paperbacks. Yes, their materials cost more, but not $10 more. They are $10 more because they represent the publishers' first chance to pay off that debt. The hardcover edition is responsible for 100% of that book's debt. Readers who want the book NOW, for whatever reason are willing to pay for the value of NOW, but many others will decide to wait.

When the publisher decides the hardcover is no longer selling, they will release the cheaper paperback. At this point, some (very, very rarely all) of that book's debt will be paid off. The paperback is cheaper to make, but not $10 cheaper. It's cost is lowered to encourage sales to readers and because it bears less of that initial debt. Same thing if the book goes to Mass Market.

Theoretically once that debt is fully repaid, which, by the way, ALMOST NEVER HAPPENS, the price of print books could drop even lower, but there are some real logistical hassles to changing the price of a print book and they do have constant overhead in the cost of printing and shipping. Logistical hassles and overhead ebooks do not have. Once that debt is paid, which, might I remind you ALMOST NEVER HAPPENS, ebooks do represent almost total profit. It is at that point that I could see the price of in-print ebooks dropping to $4.99-$7.99, with the publishers and authors splitting the profit.

In short, nearly all ebooks should stay in that $9.99-$14.99 range, but could be allowed to naturally drop in price to that $4.99-$7.99 some people believe the fruit of another human being's years of lost sleep, constant rejection, strained personal relationships, poor performance at work, declining health, flirtations with substance abuse, and other near constant side effects and risks of writing a fucking book, is worth.

Self-Published Ebooks

Another “proof of obsolescence” writers and commenters will often point to in their condemnation of traditional publishing are the $.99 self-published ebooks on offer, mostly at Amazon, however, this is really comparing kiwis and bananas.

The way I see it, self-published ebooks are like the pulp fiction of the 30s, 40s, and 50s; cheaply produced, cheaply available, offering cheap entertainment. And you know what; that's fine. The pulp industry didn't put the rest of publishing out of business because it served different needs. You wanted to read trash, you bought trash at trash prices. You wanted to read something with quality, you paid quality prices. In a perfect world, where Amazon charges sustainable prices for its wares with sustainable discounts for the producers, I don't have a problem with them being the exclusive source for thousands or even millions of self-published “pulp” fiction. It's an entirely different market from traditional publishing and bookselling.

And just like the old pulp fiction, I'm sure there is great writing in the self-published ebooks market, but I certainly don't want to wade through the crap to find it, and that is the primary value-added of traditional publishing and bookselling. Publishers wade through the crap so you don't have to.  (Just say the word "slush" around an acquisitions editor and see what happens.) Many of you will probably point out that traditional publishers still publish crap and you'd be right, but if you came into my store, or just about any independent bookstore in the country, and talked to a bookseller, you'd never end up reading any of it.

The point is digital publishing, self-publishing, traditional publishing, and print publishing can co-exist. We can have an Amazon and a Barnes & Noble, and boutique ebooks stores, and thousands of indie bookstores across the country. There are enough readers. Books are that important. But books aren't important to Amazon. The future power and profitability of market share is the only thing that is.

One Final Word About Cheap Books

After all that I'd hate to give out an insider secret to the writers, bloggers and commenters who believe the only factor that matters is price, but, well, in the interest of journalistic integrity, I feel it is my duty to do so. Here we go.

If price is so goddamn important to you, you never have to pay money for a book. Ever. Just borrow it from your local library. It's the big new book and the waiting list at the library is hundreds of people long? Wait. No waiting list is infinite. Just put your name on it and borrow another book FOR FREE. Your library doesn't currently have it? Ask your local librarian to get it for you. The only known copy of the book is locked in an adamantium box at the North Pole, surrounded by landmines and guarded by Pullman Polar Bears? Ask your local librarian to get it for you, and wait an extra few days for transportation. Librarians are librarians because they want to give books to people. Your librarian will get the book for you. You want it as an ebook? Sure, libraries haven't quite figured out ebook lending yet, but just about every book ever published before 1922 or so is available for FREE as e-book. Just go to Project Gutenberg. You will never run out of great books to read and you will never have to spend a single penny on books.

But you want the newest, hottest book, that everybody is talking about so you don't feel lame at the office holiday party? Well, fucking pay for it. In a currency-based economy, that's what you do when you want something; you pay for it.

Think about it this way. Doing push-ups and sit-ups in your living room is free. So is jogging. Once you know how to do it, so is yoga. Really, you can stay fit and healthy for free if you want to. But if you want access to a range of machines and an occasional professional opinion on how best to use them, you're going to have to pay for a gym membership. Want to take a class because you're interested in something specific? You'll have to pay a little bit more. Want a personal trainer to design a fitness regimen that works best for you, while providing motivation and guidance as you execute it? Well, you'll have to pay even more for that. You can be fit for free, or you can choose to pay for the added-value of a gym. Everybody accepts that.

If we accept that for gyms, why can't we accept that for books.

1 comment:

  1. Right on, Josh. Preaching to the choir in me, of course. But PREACH ON!!!