Ebook Math New York Times style

A recent article in the New York Times takes a swipe at explaining ebook pricing. The analysis breaks down poorly, in my opinion, by ignoring the elephant in the room.

That elephant is this: publishers have yet to control their own overhead. If they were to reduce their overhead, by moving out of Manhattan and liquidating that very valuable real estate, their sunk costs would plummet and their profit margins would rise. This is how every other business does things. Until book publishers embrace that reality, they will remain mired in an old and failing business model.

Ebook Conversion costs.: The NYT report publishers as pegging some set costs for an ebook at:

Out of that gross revenue, the publisher pays about 50 cents to convert the text to a digital file, typeset it in digital form and copy-edit it. Marketing is about 78 cents.

I’ve beaten this drum before. Writers deliver their manuscripts in electronic form. I’ll grant that I’m a technophile, but starting from an electronic form—and be aware that most publishers are using Adobe InDesign which has an automatic conversion feature to epub—it would take me eight hours or less to put a book in shape for digital publication. Even paying myself $50 an hour, we’re talking $400. Copyediting could be significantly more—but if the book is that badly off, why did you acquire it in the first place? Regardless, both amounts are fixed costs, not scalable.

What about if they have to digitize the book, all that scanning and everything? Are they going to? Bantam has the last two books of my DragonCrown War series available as ebooks, but not the first two. If they were going to be digitizing backlist, you’d think they’d start with books in that situation. And what about doing an electronic omnibus edition? They don’t them, and why not? Because they’d never do it for print, so how can they do it for digital? It makes no sense to them.

The promotion budget of 78 cents per book is a real puzzler. Again, promotion is a sunk cost, not scalable. Each book has a promotions budget ranging from $0 to millions. Once it’s paid out, no more promo cost. But when was the last time anyone saw the typical first-novel with a promotions budget? You only get money spent promoting when the publisher has gone nuts in a bidding war, jacking the advance for a book so high that there is no realistic expectation of ever earning it back. This 78 cents per book figure is pure fantasy.

Consider the Bookstores: The NYT suggests that part of the reason publishers want to jack up the prices of ebooks is to save the poor bookstores:

Another reason publishers want to avoid lower e-book prices is that print booksellers like Barnes & Noble, Borders and independents across the country would be unable to compete. As more consumers buy electronic readers and become comfortable with reading digitally, if the e-books are priced much lower than the print editions, no one but the aficionados and collectors will want to buy paper books.

“If you want bookstores to stay alive, then you want to slow down this movement to e-books,” said Mike Shatzkin, chief executive of the Idea Logical Company, a consultant to publishers. “The simplest way to slow down e-books is not to make them too cheap.”

Read between the lines: the expansion of bookstores in the 1980s and 1990s to these big-box megastores to crush independent bookstores everywhere has left the major chains overextended and bloated beyond all reasonable expectation of profitability. Their business model is failing, too. They need to expand their online presence (to fight Amazon), get into the digital marketplace (with the Nook and other devices), close stores (like Waldenbooks outlets) and, in the near future, shrink their megastores to things that more closely resemble the independents they crushed, which will allow them to hand-sell books and make use of POD publishing in a back room.

Book publishers want to prop the bookstores up because that’s where they get most of their revenue. But those stores are in trouble, and the returnable/commissions model has been unworkable for decades. The fact is that the returns policy means that for every book sold in the USA, two are printed. Not only is it wasteful of resources, but it encourages sloppy business practices. If a store can over-purchase a title, then return everything that did not sell, where do they have to think? Why do they need a promotions budget? They’re just a warehouse with good lighting and carpet, not a true retail business driven to make a profit—and this combination of gluttony and sloth has brought bookstore chains to the brink of collapse.

And this surprises you why? The NYT offers the following as evidence that folks in publishing are completely detached from the real world:

Certainly, publishers argue that it would be difficult to sustain a vibrant business on much lower prices. Margins would be squeezed, and it would become more difficult to nurture new authors. “Most of the time these people are probably not going to make huge sums of money the first time they publish,” said Carolyn Reidy, chief executive of Simon & Schuster.

In fact, the industry is based on the understanding that as much as 70 percent of the books published will make little or no money at all for the publisher once costs are paid.

Two things are wrong with this: Authors make a percentage of the cover price. This means that the more books sell, the more they make. The author has done his job at the point where the publisher decides to go to work. The profitability of any book is not in the hands of the author, it is in the hands of the publisher. Now, if 70% of all books make “little or no money” for publishers, the fault, dear Brutus, clearly falls with the publishers. Either they’re not picking books that can sell, they’re not pitching them at the right market demographic, they have incurred unreasonable costs in producing the book or are engaged in other silly business practices that guarantee that financial failure is the norm, and success is an accident.

All of the above is the most likely scenario.

The New York Times article has other gems in there, like noting that publishers have to account for unearned advances, so they have to write those off. Really? Get more realistic in what you offer; and promote books so you maximize the profits out of the ones you acquire cheaply instead of doubling-down on loser bets. In other words, act like a business, not some badly run, Triple-A baseball franchise.

Here is the pity of all of this: traditional publishers are sitting on roughly fifteen years of content for which they own the ebook rights. They have asserted control well beyond that, but the courts and contracts dispute their argument. If, instead of worrying about the cost of acquisition going forward, they were to cull their lists and do sensible things, like pull series back into print, like creating omnibus editions of books (taking a page from media outlets that are bringing out DVDs of every old TV series ever, and doing full season compilations as well as compilations of film series); they would only incur the cost of digitization, since all those other costs were covered years or decades ago. It used to be, in science fiction anyway, that backlist sales kept many publishing houses afloat. They can revive that older revenue stream and it will buy them time to transition to the new age of publishing.

My bet is they won’t, and for two reasons. First, backlist has been dead since 1988, so most of them have forgotten it exists. Second, and far more dangerous, is that authors themselves own the ebook rights to much of that backlist. Once authors realize that we can do it ourselves and make 70% of the retail price of any offering or more, our incentive to accept 25% of net (the last deal I was offered)—which translates to 17.5% of retail price—goes away.

And, with it, goes traditional publishing.