Two news stories from the past week juxtapose one another in my mind on this Monday morning. First is the story that the Apple iTunes Music Store celebrating its 10 billionth download last week. Imagine! Billion always gets my attention. This is a business that is only seven years old! Now, contrast this celebration against the angst taking place in the book publishing business.
Today's New York Times includes an article explaining why the e-book pricing of $9.99 just doesn't add up for book publishers. Amazon has defended the e-book consumer's demand for the electronic book discount. But, according to the publishing industry, there's not enough money to go around even at the higher $26 hardcover price. On a typical new hardcover, the bookstore pays 50% of the retail book price, yielding only $13 to the publisher. The author is paid $3.90 and the printing/shipping/storage costs $3.25. Cover design, typesetting, editing, and marketing add up to another $1.80. Of course many books also aren't profitable and will need to be written off. The industry pleads its case saying:
Without accounting for such write-offs, the publisher is left with $4.05, out of which it must pay overhead for editors, cover art designers, office space and electricity before taking a profit.
Does this story sound vaguely familiar? The internet has completely changed the way many industries conduct their business. When I began my stock brokerage career with Merrill Lynch in 1979, retail stock commissions were the norm. Not so anymore. More recently the music recording industry has been rocked to its core (actually that's not true as the core may not even still be there) by the iTunes Music store. Who buys an entire CD at $18 just to own one favorite song track these days?
So to hear the print publishers talk about why it's so unreasonable to charge $9.99 for a new e-book simply makes me think, 'Here we go again.' The simple truth of the matter is that the marketplace will ultimately determine the future of book pricing. We call this concept the free enterprise system. If and when a company can offer a preferred product at a lower price, those companies with a locked in higher cost structure will be left behind.
This is not a new story. And the arguments that are being offered in defense of the existing higher cost/higher price environment are not new arguments either. (1) People want to shop at bookstores:
“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.”
It is true that there is something wonderful about browsing through a bookstore. It's one of my favorite things to do. However, here again, the marketplace presents a harsh reality. Price rules. The same Barnes and Nobles and Borders that forced many smaller bookstores out of business based on price will now face identical circumstances, except now they are the high-priced alternative. Music aficionados also used to love to shop in music stores. They still do... online.
(2) New artists, who might create new books, won't have a marketplace:
Some of these books are by writers who are experimenting with form or genre, or those who just do not have recognizable names. “You’re less apt to take a chance on an important first novel if you don’t have the profit margin on the volume of the big books,” said Lindy Hess, director of the Columbia Publishing Course, a program that trains young aspirants for jobs in the publishing industry.
New, aspiring authors will have to change their own marketing plans in the new, lower-cost environment. Though this is not necessarily a bad thing. What's the way an author gets discovered today? She mails her manuscript to publisher after publisher after publisher. The marketing often takes longer than the writing. And frankly, most new authors are never picked up by a publisher. In the new environment the author can publish her work directly with the end sellers, avoiding the publisher altogether. This is already happening in the music industry. We are just now beginning to see this in the Kindle online bookstore.
(3) Existing publishing companies won't be able to cover their fixed costs.
Publishers point out that e-books still represent a small sliver of total sales, from 3 to 5 percent. If e-book sales start to replace some hardcover sales, the publishers say, they will still have many of the fixed costs associated with print editions, like warehouse space, but they will be spread among fewer print copies.
This is absolutely true. And absolutely irrelevant. No one who loves to read e-books will care about the publisher's expense of warehouse space. Companies that figure out how to compete at lower prices and offer better reading experiences electronically via Nook, Kindle or iPad - or any number of other new technologies likely to come out in the next few years - will not only survive but will thrive in the future.
