Where is your money going?

I was inspired to write this post by a couple of recent articles lamenting how the e-book revolution is making things tougher on authors: a WSJ article about the plight of authors, and a Futurebook description of a panel discussion about the future of books. My first thought was that the e-book revolution has increased my sales and income almost a thousandfold (OK, so it wasn’t very high to begin with!), and that the lower costs of e-books, the worldwide digital distribution they afford me, and the ability to reach readers without going through layers of middlemen (publishers and agents) has allowed me to price my e-books competitively and sell more books in a month than I used to in a decade. How can this be bad?

My second thought was that the two articles I read, and the dire predictions and “woe-is-me” lamenting therein, were mostly coming from those same middlemen: publishers and agents.

Let’s start off with some facts about where your money goes when you purchase a print book or an e-book:

• Hardcover: These books retail for around $25, yet cost about 1/10th that amount — about $2.50 to print.
• Trade Paperback: Retail for about $14, cost about $1.
• Mass-Market Paperback: Retail about $8, cost about $0.75.
• E-Books: Retail anywhere from $0.99 to $14.99, but most new releases from large publishers are $12.99. No printing costs, although they share the editing, cover design, and other costs of print books, and do have some formatting costs as well.

One interesting thing is that, as customers have clamored for lower e-book prices — rightfully claiming that there are no printing, shipping, or returns costs for publishers to account for — publishers have claimed these costs are only a small fraction of the cost of a print book (about 10%). Now, I think they’ve underestimated the costs of shipping and warehousing books, and the tremendous cost of accepting returns (for full credit) of unsold books by bookstores — sometimes paying for return shipping, sometimes having the books simply destroyed, and other times selling them in bargain bins for a fraction of the cover price. But I’ve seen enough data to convince me that the printing costs of a book are roughly in the ranges I spelled out above, when printed in large offset print runs.

One thing that jumps out at me is that hardcovers only cost a buck or two more than paperbacks, but can sell for $10 or $20 more. When Macmillan’s CEO John Sargent laments that “the value proposition goes ever downward when on screen … the perceived value decreases without a physical object,” I think what he’s really saying is that publishers can’t rip readers off for paper any more. I don’t think most readers understand that the extra $17 they pay for a hardcover is only $2 for the extra cost of the physical object (the paper and cover) and $15 as a “you want it first, you pay way more” tax. In other words, publishers were successfully able to charge triple the cost of a paperback for the hardcover version by combining the “it’s new, so it costs more” and the “look at how much nicer and more durable the hardcover book is” costs — without people realizing that the vast majority of the extra cost was the former, and the nicer paper and stiff cover was only a small fraction. With e-books, such intermingling is impossible, since the format of the book doesn’t change — not only are you getting the same words, but there’s no longer a different physical format to throw you off. And I think customers have said, “OK, I don’t mind paying a few bucks extra when a book is new, but there’s no way I’m paying that much more.”

Since I believe most readers overestimate printing costs, a related effect is that, once readers understand that printing costs of an e-book are zero, publishers can no longer exploit that lack of knowledge. Instead of being able to combine “new book tax” with “nicer, more expensive to print hardcover” costs, readers now understand there are no print costs with e-books, and can see the new book tax for what it is. Unfortunately for publishers, their industry had evolved to the point that the huge profits of hardcovers were what had kept them afloat.

So, let’s break down where your money goes a little more closely, shall we?

Cost breakdowns for print books vs. e-books

Your typical hardcover book costs around $25. The retailer (Barnes & Noble or Borders) typically pays the publisher about half the list price, so the publisher gets $12.50 (assuming the book sells, otherwise the bookstore sends it back!). Of that $12.50, it costs $2.50 to actually print the book, and the author gets a 15% royalty, which is $3.75. That leaves $6.25 to the publisher, from which they have to pay for their editors, proofreaders, cover designers, print layout people, CEOs, lawyers, advertising, and rent for big offices in New York City. Whatever is left over, is profit.

The typical trade paperback sells for about $13 (maybe a bit more, but this price will line up nicely with e-book pricing), costs about $1 to make, and provides an 8% royalty to the author ($1.04). Subtract the 50% retailer cut ($6.50), and the publisher profit is $4.46.

The numbers for a mass-market paperback book that sells for $8 would include about 75 cents for printing, an 8% royalty to the author (64 cents), and the same 50% ($4) to the retailer. That means the publisher is left with $2.61 for all their costs and profit.

E-Books used to be sold under a similar model: publishers priced them the same as hardcovers (!!!), retailers paid 50% of that price to the publishers, and then sold them for whatever they wished (list price, or some discount from list price, like how Amazon sold e-books at a loss for $9.99). Publishers insisted on the agency model, where the publishers set the sales price (not the retail price), and get 70% of the proceeds. Under this model, a $13 e-book garners 30% to the retailer (like Amazon or B&N.com), 70% ($9.10) to the publisher, and an author royalty of 25% of the publisher’s net proceeds (instead of the cover price), which works out to 17.5% of the cover price, or $2.27 in our example. The publisher has no printing costs, but let’s be generous and include 10 cents or so to account for e-book file creation (which is a one-time cost divided by the number of e-books sold). Subtract the $2.27 due to the author from the remaining $9.00, and the publisher is left with $6.73.

To recap, a hardcover nets the publisher $6.25 (or 25% of the cover price), a trade paperback $4.46 (34.3%), a mass-market paperback $2.61 (32.6%), and an e-book $6.73 (51.8%).

Wait, and publishers are complaining about e-books? They just found a way to earn more money on each $13 e-book than they used to make on a $25 hardcover. The percentage of your money they’re ending up with has more than doubled in the e-book world — and that’s the really important number, because don’t you think they can sell a lot more e-books for $13 than hardcovers for double that price?

And what about the author? Well, I may be biased, but it seems to me the author isn’t getting all he deserves here on e-book sales. First of all, publishers justify giving authors only 8-15% royalties in the print world because publishing a novel includes a lot of financial risk: to get those low per-book printing costs requires large print runs, and that involves up-front capital and the risk of paying for a bunch of books that never sell or get returned. There are also costs of storing and shipping all those books (along with the costs of editing and preparing the book), almost all of which occur before the first sale is made — and the publisher doesn’t even get paid for print sales until a month or two later! On the other hand, with e-books, there will be some editing and preparation costs, but there are NO printing costs or other huge up-front outlay of money for shipping or warehousing. There’s no way to lose money by printing more books than you sell, and publishers get paid much quicker on e-books as well. It seems to me that if publishers deserve the lion’s share of the revenue from books because of all their up-front financial risk, then the corollary is also true, and they don’t deserve as much if their financial risk is lower, as it clearly is with e-books. Instead of doing editing and cover design work, printing tens or hundreds of thousands of copies, and using their vast distribution, storage, and shipping network to get their books into thousands of bookstores across the country (and thus earning their share), publishers are now just doing the same editing and cover design work and a relatively-painless e-book conversion and upload process, and are taking 75% of the proceeds.

Now, I’ve done a lot of proofreading and editing, and designed my covers, formatted my e-books, and uploaded them to Amazon and elsewhere. And it takes a good deal of time and effort — but it does NOT take 3x as long as writing the book in the first place! For a large publisher especially, the formatting effort should be minimal — I know my third book took a lot less time to format than my first once I got the hang of it. More importantly, these jobs don’t require huge publishers with lots of money: authors can hire editors and cover designers by the hour or for flat rates, without giving up the majority of their books’ revenue forever!

I find it interesting when literary agent Simon Lipskar chides readers that they “should feel guilty if they buy a Kindle edition versus a hardcover, but not versus a paperback, in terms of what the author gets.” Whoa. Who determines how much the author gets? Right, the publishers. And, besides, even at 17.5% of gross, an author’s e-book take is still better than their hardcover take, let alone the measly 8% they get from paperback sales. (Of course, for an independent author like myself, I get the full 70% of e-book revenue after Amazon takes its 30%, so I have no complaints — I can charge readers much less for an e-book and still make a higher royalty than on a paperback, which is a win-win in my book.)

The bottom line is, e-books not only cost a lot less to produce (no printing costs, shipping, warehousing, or returns), but also require far less up-front investment and risk. Since those are costs and risks borne by publishers in the print world (and they are compensated for it), it only makes sense that removing those costs and risks should reduce the cut publishers are fairly entitled to take. Instead, publishers want the best of both worlds: reduced costs and risks, and they want to keep more of the purchase price for themselves.

Now, I do understand the publishers’ current dilemma: they’re caught between the new economic realities of e-books and their old business models, and 92% of book sales are still print. So, they may need to do a lot of painful downsizing and re-organizing, but they can’t do it all just yet and abandon their print sales model. But what frustrates me is that publishers aren’t telling us this, they’re not saying, “This is a tough transition time and we need to do certain things for the next few years and then here’s how we see things shaking out.” They’re not offering authors 17.5% of e-book royalties for the first 5 years, to increase to double that once e-book sales overtake print, or whatever. They’re not moving forward with their transition plan, they’re just trying to protect the status quo by fighting e-book adoption. And, like lots of businesses, it seems they’re more interested in protecting their own short-term profits and salaries and bonuses than in working on a long-term, sustainable business plan that’s fair to readers, authors, and publishers in the new digital world.