Wednesday, March 10, 2010

The Value of Ebooks

Let's define the term "value" as "a fair equivalent in money for something sold."

Let's define "devalue" as "to lessen the worth off something sold."

So does a $1.99 price point for ebooks constitute their value? Or does that price devalue the work?

In a capitalist economy, under the rules of supply and demand, things cost money to produce, and their price is dictated by how many things are produced and how many people want to buy them.

An item usually costs a determined amount to create (which tends to go down as more items are produced), and then wholesalers and retailers sell this item for what the market will bear, trying to make a profit.

A few years ago, when the Nintendo Wii was a hot item and hard to find, people who were able to get Wiis sold them on eBay for more than double the $199 list price. The Wii's value was higher, because demand was higher.

Now you can buy used Wii's for less than $100. There is a big enough supply for everyone, so the price comes down.

So how do ebooks fit into this?

For the moment, let's ignore the hard work the author has put into writing the book.

To bring an ebook to market, a book needs to be edited, proofread, put into a proper layout and format, and given cover art and a product description.

These costs can fluctuate. But they are one-time costs.

Once an ebook is created, it can be reproduced indefinitely for free. There are no printing costs or shipping costs. Distributing ebooks to readers costs about 5 cents per download.

The retailer selling the ebook (Amazon, Sony, B&N, Apple) takes a percentage of the cost of an ebook. It looks like all of the retailers are adopting the agency model, which means they no longer can set the price of the books they sell, and they keep 30% of whatever that price is.

That leaves 70% of an ebook's price to be split between the publisher and the author. This split depends on what the contract says, but currently the going rate is 25% of the wholesale price to the author, 75% to the publisher.

Publishers seem pretty sure that the value of an ebook is $9.99 or above. It makes no difference that they no longer have to pay for shipping or printing or warehousing, or that their huge advertising and marketing departments won't be needed nearly as much for ebooks, and the sales department won't be needed at all. They want ebooks to be priced comparable to trade paperbacks, at least during their initial release.

One of the things I've heard several publishers mention is that they want to be able to establish the value of their ebooks. And that low-priced ebooks are devaluing their true worth.

When I hear this, my bullshit meter peaks.

Aside from some minimal set-up costs, ebooks cost next to nothing to produce or distribute. They have no inherent value, except in the entertainment value of the words.

In the past, publishers have determined the value of those words at around $25 for a hardcover new release. They determined this because of all the people who needed to get paid in order to bring the book to the consumer. Besides the printer and the shipper, the distributor got a cut, the bookstore got a cut, the author got a cut, and there were other costs like corrugation, advertising, and marketing to go along with the cover art, layout, and editing. So the author made $3.00 on a hardcover, and everyone else got a piece of the pie, and customers who wanted the book had to pay that $25.

But a lot of these costs get eliminated with ebooks. Yet publishers continue to insist that consumers are willing to pay print prices for intangible objects loaded with DRM and linked to a proprietary format.

Well, yeah, because publishers need to meet the same overhead that they're currently struggling to meet with print. They look at what they need to survive, and they have determined they can't sell ebooks for less than $9.99, even though common sense says they could downsize, reorganize, and probably do so.

What publishers aren't taking into account here are the consumers.

Naturally, people would rather pay less for something than more. And in a digital world, like we're rapidly becoming, consumers have shown consistently in other forms of media that they place less value on downloads than on physical products.

When companies price digital content too high, consumers respond by pirating that content. That's the ultimate in "devaluing."

So what is truly the value of ebooks? Is it free? Or is it the publisher's price, which seems inflated, and which in the agency model gives them 52.5% of the list price of an ebook for doing nothing more than providing a cover, editing, and putting it up on Amazon?

If an ebook is free, the author gets screwed.

If an ebook is priced high, it won't sell a lot of copies, and the author gets screwed.

If an ebook sells for a small amount of money, the author makes 17.5% of the list price. That also seems like the author is getting screwed.

Publishers are currently talking about going 50/50 with authors, so an author will make 35% of the list price. But it's still the price the publisher sets, which is inflated, which will lead to piracy.

By setting the price, the publisher is pricing ebooks so they won't sell well, and then taking 35% of what little money will come in.

I can write a novel pretty fast. But I'm betting I spend more time writing the book than my publisher spends making cover art, editing it, and uploading it. This is a fair 50/50 split?

In the past, authors needed publishers in order to get their books to readers. Authors needed the publisher's connections with bookstores and distributors. They needed the publisher to print and ship the books. They needed the publisher's marketing and advertising departments to make sure those books sold.

In an ebook future, authors don't need all of that. They need editors, cover artists, and someone to upload the book. And they shouldn't have to give up half of their money for those simple services.

But let's get back to value, and what ebooks are truly worth.

Supply and demand doesn't apply in a system where the supply is infinite. But consumers still vote with their dollars. And they prefer to spend less rather than more.

How does this work out for the author?

As of right now, my ebook The List has sold 10970 copies on Amazon at $1.99 each. I currently make 70 cents per download. That means this book has earned me $7679.

Compare that to my ebook Fuzzy Navel, controlled by my publisher, Hyperion. This book currently sells for $7.19 on Amazon (they're losing money on each book sold) and I earn $2.25 per book. As of my last royalty statement, Fuzzy Navel has sold 273 copies, earning me $613.

According to publishers, the $7.19 is still devaluing the ebook, which should be higher. $1.99 is certainly devaluing the book, and publishers believe they'll go out of business selling for so low.

And yet, I made $7000 more, and sold 40 times as many copies, selling for the lower price.

So what is the true value of ebooks?

Recently, publishers have forced Amazon to adopt the agency model. That means the above numbers will change dramatically once this new model kicks in.

How dramatically?

I'll be forced to change the price on The List, going from $1.99 to $2.99, to get the 70% royalty rate. I don't know if it will sell as well at the higher price, but let's say it does. That means 10970 ebooks sold will earn me $21,172.

Since publishers are now controlling the price, let's say Hyperion raises the price of Fuzzy Navel to $9.99. I don't know if it will sell as well at the higher price, but let's say it does. That means 273 ebooks sold will earn me $477.75.

Hey! Wait a second! The price went up, and I'm earning less?

It gets worse. I fear that if they raise the price to $9.99, fewer people will buy it. $2.99 is still an impulse purchase. $9.99 is a lot of money for a download.

But maybe Hyperion will get smart, and actually drop the price to something reasonable. Say $2.99.

Let's say at $2.99 I sell 40 times the copies I'm currently selling, as with The List. That means I'd make $5740.

That seems better. Not as much as the $21k I'd make if I self-published it using the agency model, but a helluva jump up from the $613 I made selling for $7.19.

So I ask you. What is the true value of ebooks? Is it $9.99 and up? Or is it $2.99 and down?

Seems obvious to me. But I'm not in charge of a large publishing company trying to sell paper, which is apparently more important to them than embracing the future by figuring out what I already have:

The value of an ebook is determined by the overall amount of money it earns, not the list price.

Let's see if publishers can figure that out.