My Pages Back
In the immortal words of dead novelist and critic Algis Budrys, I would now like to review the money involved. Because while we surely all agree that the fate of civilization itself rests on the Amazon-Macmillan controversy, it is a dispute about money before it’s anything else. So I will don my day-job hat for the duration of this post. Let me caution people that my numbers are impeachable and invite substantiated corrections to the calculations and reasoning that follow.
We can start with ireaderreview linking BookFinder.com glossing Money magazine, then, guided by gettingpublished, correct for a material omission.
I am a commercial publisher and bring out a hot new bestseller for the going cover price of $28.00. I sell it to the wholesaler for 45% of that price, $12.60.
I pay $2.80, 10% of cover price, in printing costs. This being a hot new bestseller, the author commands a 15% royalty (on cover price), $4.20.
Oh but there are returns. Booksellers can return unsold stock to publishers. Publishers hate this, but they’ve always hated it, and they’ve always taken returns. Depending on source, channel and year, 20-40% of books publishers sell get returned. Superstore return rates are in the 20-30% range. Most returns don’t get remaindered; they get pulped. I can’t find Amazon’s return rate. Let’s assume it’s at the low end, 20%. So our net unit revenue drops by $2.50. (I round.)
Author royalties tend to be net of returns, so knock off $0.85 from them. (I round again.)
Now we can look at publisher gross profit for a hot new bestselling hardcover:
12.60 gross unit revenue
-2.50 returns
————-
10.10 net revenue
-2.80 printing costs
-3.35 royalties
—————
-6.15 cost of goods sold
$3.95 gross profit
39% gross margin
That times the number of copies sold pays for marketing and operating expenses, with profit left over if you do it right.
The more I look into what’s publicly available on publisher Kindle terms, the less confidence I have in what I think I know. I’ve seen everything from, “Amazon pays the standard royalty on the hardcover price, split 50/50 between author and publisher like other ancillary rights,” to “35/65 of the Kindle price, publisher/Amazon” to a 50/50 split of same.
Now that Apple is elbowing into their action, they are raising the split to 70/30 of the Kindle price in favor of the publisher, with conditions. The conditions do not appear to include exclusivity.
Depending on which of these terms obtain, my gross profit on a Kindle sale, as publsher, ranges from $2.10 (very first option) to “$7.00 less author royalties” – whatever they may be.
But remember, what I’m comparing that number to is not $28, or $12.50 or $9.99. I’m comparing it to $3.95, my gross profit swag on a hardcover. As far as price points, I am saving $5.30 a number on manufacturing costs plus return reserves.
My intuition is that $2.10 is substantially more than a publisher makes on the sale of a mass-market paperback, while “$7 less royalties” compares reasonably to the gross profit on a hardcover. Keep in mind that the latter terms only just became available.
At $2.10, I look at ebook sales as okay ancillary income, but the prospect of their replacing hardcover sales scares me to death. Unless each lost hardcover sale becomes two ebooks, I have less money to absorb my marketing and operating expenses. At the new 70/30 split of $9.99 though, I am probably at par with hardcovers on a unit gross-profit level.
The above ignores another probable benefit of ebooks to the publisher: cash flow. In the world of physical books, I pay the printer now and get paid by the bookseller later. I may do this with a line of credit, but then I still have interest charges. Timing of cash out and cash in is still an issue, and because books can bomb, cash out is a risk. With ebooks, my incremental cash out is very low. So is the ebook vendor’s.
So what’s going on below gross profit? With ebooks, you’ve got some incremental expense for ebook prep and delivery costs over Whispernet. Whispernet costs are incremental, about a dime a book. I don’t believe that marginal ebook prep costs will remotely approach printing costs of physical books.
UPDATE: More correct information on the actual present state of Amazon terms for large publishers in the update to a later post.
Comment by mph —
January 30, 2010 @ 7:05 pm
Yep.
I can (and have) converted a book put together in InDesign into a Kindle-friendly version in just about two hours, including about three dozen figures with captions, and that includes the time to get some of the details right, like using custom chapter title graphics. It’s just HTML, with an extra 20 minutes of learning time to learn a few Kindle peculiarities. Some of that two hours even included writing the Ruby to make it go faster next time. I got paid about as much as I used to make for five hours of development editing on an Idiot’s Guide
It’s the kind of task that the sort of person referred to as a “power user” does by hand just once before learning enough VBScript, AppleScript, Ruby or Perl to automate the process the next time.
I fully expect InDesign and similar apps to eventually pick up an export option that makes producing an ebook in editions suitable for Kindle and the ePub-capable readers about as difficult as clicking “print.”
My sideline as an artisanal crafter of ebooks has a pretty dismal future outside of catering to the odd independent author/technophobe.
Once the assorted platforms catch up to a simple Web browser in terms of the kind of flexibility and control they offer for presentation (e.g. you can start using positional CSS for stuff like sidebars and callouts and a. and expect it to work & b. look any good on the displays) there’ll be another brief lag while the software makers come to terms with that. Then you’ll think about as much about preparing an ebook edition now as the average Mac user has to think about preparing a PDF.
Sorry … five grafs on something that didn’t even really need to be confirmed.
Comment by Ken Houghton —
January 30, 2010 @ 7:45 pm
You’re unbundling the Amazon profit: they expect to make up in Kindle sales what they lose in eBook price.
The problem is that that’s not a sustainable business model. I don’t know Kindles–as with Kathryn, I don’t have an e-reader other than Adobe–but I’m betting that after about 25-35 books are bought, the balance between the two areas of the firm is near zero.
Which means that when the Kindle catches on with enough people, either (1) the retail price has to go up or (2) the payment to the wholesalers (publishers) has to be reduced.
If we assume the latter–which Macmillan is, since it is the most reasonable in the near term; Amazon uses its monopoly powers to pressure to keep the price point and make it profitable to them–then the choice for hardcover sales becomes either (1) don’t offer the eBook at the same time as the hardcover or (2) get clobbered in hardcover sales, while reducing author and publisher revenues.
Amazon’s trying to create a situation where they win short-term by destroying the profit models for authors and publishers in the long term. Which worked until AAPL said, “Gosh, we’ll make a profit from Day One on both eBooks and the tablet-named-by-closeted-men.”
Comment by Jim Henley —
January 30, 2010 @ 8:35 pm
Hi Ken: I’m gonna need your help in working through your thinking here, please. (Also, who is “Kathryn?”)
This post concentrates on the publisher’s economics. If I look at hot new hardcover things from Amazon’s side, what I see for the books is discounts off cover price from 34-54% off. (54%? Crazy.) The low end discount is DEAD MEN’S BOOTS, neither hot, nor new, nor a bestseller. Also, not as good as the previous two books in the series! GAME CHANGE shows a 54% discount, selling for $13 even. The book in the middle is CHANGES: Dresden Files Book 12. Browsing the Spring Blockbusters come-on, I see a lot of $28 books selling for $15, and a few others for $17 or $18. So let’s say Amazon’s average selling price is $16.
They paid the publisher $12.60, per the main post. (Returns to pub don’t come off Amazon’s unit sales price because those books haven’t sold in the first place. There’s no AMAZON revenue associated with the returned books.)
So Amazon is making, generously, $3.40 gross profit a number on the hot new hardcover.
Clearly, pre-Apple, they were making $5-6.50 on a Kindle sale of the same book. In the new iPAD era, they’re prepared to make only $3 in unit GP on a HNH Kindle sale.
The old split was awesome for Amazon! The new split is worse at the gross profit level by $0.40 a sale. BUT I get the strong feeling that Amazon can save a LOT of incremental expense on a Kindle sale versus a thingie sale. Plus, competition! They don’t have a choice.
Do you see the economics of the book-sales themselves differently? Given, again, the necessity of estimating the publisher’s gross wholesale price.
Because from the above numbers, I can see how each side in the relationship can tell themselves a sob story they will earnestly believe. But I want to make sure I know what you’re driving at.
Comment by erisian23 —
January 31, 2010 @ 3:35 am
e-readers scare the hell out of me.
the geek in me sees the new shiny devices and salivates. he says “look at all the features, rich in joyful goodness”. i itch for instant access to new media and some of the supposed increases in wpm reading speed, minimized eye strain compared to crt/tft, etc.
the book lover in me feels like a traitor for even considering a reader. i know what my spending habits became the second i met napster. media went down hill for me from there. i know my own mp3 and divx habits.
books have always stayed sacred though. jst like vinyl, they have maintained their untouchable stance.. but an e-reader/ebooks.. i have fear of what my personal impact on the publishing community could be if i were to really embrace this “new”ish tech.
all the math above in post and comments just makes clouds my decision process even more.
(thanks for the touchpoints!)