There has been a lot of discussion about ebook pricing lately. I did a post following Motoko Rich writing about this in the Times, but Rich’s post itself was a sign of the discussion taking place, not the catalyst for it. Today in Publishers Lunch, Michael Cader runs through some calculations to demonstrate that when publishers shed the costs of printing the books they sell as well as the costs of warehousing them, printing books they don’t sell, and handling returns on books they thought they’d sold, they can reduce retail prices by 40-50% and still be taking in the same number of margin dollars.
Cader points out that there is a different problem of unintended consequences: if a lot of business shifts to ebooks, then the critical mass requirement for many brick-and-mortar stores might not be met and we’ll develop a downward spiral of printed book exposure and sales. That’s an accurate point, but I can’t see too many people trying to slow down the growth of ebook sales to address it.
We have suggested here that publishers should be reducing the discounts offered to retailers because, as much as publishers’ costs go down moving from print to digital, so do retailers’. And because retailers have a (sensible) penchant for turning excess margin into consumer discounts, the discounts being offered lead to a very tenuous situation for publishers. Many retailers are living with just the margin they probably need, but they’re doing it voluntarily. The low price the consumer is getting is because of retailer policy, not publisher policy. If the publisher sells downloads directly at the same price, the retailer is (justifiably) going to say “hey, the discount you offer me is supposed to be off the publisher’s price, so if you sell at discount, don’t you owe me some money?
The widely-remarked on Amazon Kindle pricing underscores this point. Amazon is buying ebooks (for the most part) at 50% of the publisher’s suggested retail. But then they’re giving away much of, all of, or even more than that margin to give the consumer a lower price (often the billboard price of $9.99.) Nobody expects Amazon to sustain this sell-at-a-loss strategy forever. And few expect Amazon to raise prices to the consumer. That leaves one alternative: use the leverage of all those Kindle owners to get reduced prices from the publisher.
And that’s why, in their own interests, publishers have to reduce retail discounts across the board.
Authors are facing a different margin pressure. Publishers generally find it easier to reduce the author’s take than the retailer’s so, even before putting pressure on retail discounts, they have been reducing author royalties. Just a few years ago, there was bold talk from the author side that a 50-50 split of ebook revenues between publisher and author made sense. But it seems that the “standard” for ebook royalties has settled in at 25%, or even 15%, of publishers’ receipts. Since discounts are about 50%, that amounts to 7.5% to 12.5% of retail, which is hardly a bonanza for the authors. And remember, many informed voices are clamoring for that suggested retail price for ebooks to come down!
It is because the market is young and the flux is still great that I suggest that publishers should be rethinking intermediary discounts. For the same reason, it is also time for authors and their agents to be rethinking the royalty rules. Expressing royalty as a percentage of either retail price or net receipts is a concept that makes a certain amount of sense in the physical world, where the cost of manufacturing creates an anchor for pricing. There is a certain minimum price below which publishers won’t go when they have to pay to print books. And bigger, fatter books, which cost more to print and would drive up both retail price and royalty, also imply a greater contribution of IP by the author.
But in the virtual world, perhaps it would work better for everybody if authors negotiated to get a flat number of dollars (or cents) per unit sold. Publishers should really have no problem handling this: they’ve been working with pricing with a known cost-of-goods higher than zero for a very long time. And, for authors, it would eliminate the possibility that diminishing ebook prices will lead to royalties which by historical standards are laughable and for an author trying to make a living are unsustainable.
This practice will probably arise when agents see the need to negotiate a mimimum dollars or cents royalty per ebook sold to protect against overly-aggressive promotional pricing, which is already proving to be a temptation for publishers with no physical cost of goods and with author royalties that decline with price. With Scribd offering 80% of the retail price and Smashwords offering 85%, authors will calculate very quickly how low their prices could be to yield the same return (or maybe, twice as much return) for each copy sold than what is the standard offering now. When Scribd and Smashwords files are as easily secured for the iPhone as anybody else’s, the agents will have a very hard time convincing their authors to accept things as they are.
Posted this originally without a reminder about Thursday, May 28 at BEA: “Stay Ahead of the Shift.” AND there are two panels I’m moderating you’ll want to see. On Thursday at 3, Brian O’Leary, Laura Dawson and I are doing “XML for Editors.” And on Friday morning at 9:30, I’ll moderate “Digital Debuts Tool Time” with the leaders of at least three great new propositions on the stage with me: Hugh McGuire of BookOven, Mark Coker of Smashwords, and Peter Clifton of Filedby.