Even as readers grow more comfortable with digital books, some continue to question why so many of the most popular new e-books are priced so high.
Michael Connelly's recent legal thriller, "The Fifth Witness," has more one-star reviews on Amazon than five-star reviews in part because some angry reviewers focused on the e-book's $14.99 price.
As physical book sales fall, publishers' fixed costs are becoming more cumbersome. One area major publishers can cushion the blow is by keeping e-book prices higher. A New York publishing executive, who asked not to be identified said.
"If e-book prices land at 99 cents in the future we're not going to be in good shape."
Indeed, e-book prices on many new national best sellers are higher today than they were at the start of last year. That's because the six major publishers have adopted a new pricing model, known as "agency pricing," championed by Apple Inc. Publishers, worried about the deeply discounted $9.99 digital best-sellers promoted by Amazon.com Inc., agreed to set the consumer prices of their digital titles. Under this model, retailers act as the agent for each sale and take 30%, returning 70% to the publisher.
The major significance of agency pricing was that it made it impossible for a retailer to discount the price without the approval of the publisher. The impact was immediate. Amazon had built its market share in part on aggressive price discounting in which it actually lost money on the sale of many of the book industry's most popular titles.
For example, if a new hardcover book was priced at $26, the digital wholesale price was often $13. If Amazon sold the book for $9.99, it lost $3.01 per sale.
Although many books continue to be sold at $9.99 or less, the wild days of using the country's most popular titles in digital form as loss leaders are mostly over. For example, Stephen King's coming thriller "11/22/63" is priced at $35 in the hardcover format and $16.99 as a digital book.
Publishers argue it's impossible to break out a profit per title that includes a percentage of all their costs because all books have unique one-time costs which are broken out over an unknown number of copies. It's also hard to apply corporate overhead costs against the sales of individual titles. Assigning a fixed overhead percentage is an accountant's convenience, not a fact, says Mike Shatzkin, chief executive of the Idea Logical Co., a New York-based publishing consultancy.
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But a back-of-the-envelope calculation of a new e-book priced at $12.99 on Amazon or through Barnes & Noble Inc. under the 70%-30% agency pricing model suggests a return of $9.09 to the publisher in the form of sales. The publisher then typically has to pay the author 25% of net sales in the form of a royalty, or $2.27. This leaves a gross of $6.82. Subtract 90 cents for digital rights management, digital warehousing, production, and distribution, and that leaves $5.92.
By comparison, a hardcover book priced at $26 and sold under the traditional wholesale model will return $13 to a publisher. Subtract 15% for the author royalty, or $3.90, and that leaves a gross of $9.10, says publishing executives. Mr. Shatzkin says that it's appropriate to then deduct about $3.25 per copy for shipping, warehousing and production, leaving a gross per unit sold of $5.85, from which publishers must pay for returns and inventory. The fact that digital books don't have returns and inventory reduces some of the publisher's risk and makes digital an attractive format, says Dominique Raccah, chief executive of Sourcebooks Inc.
Neither of these examples includes possible deductions for unearned advances or marketing.
It's unclear that lower e-book prices always result in revenue gains from additional sales. But publishers are likely to face more pricing pressure down the road.
But "over time there's bound to be pricing pressure because there will be more and more self publishing efforts at lower efforts offering a wider range of choices at lower prices," says Mr. Shatzkin.
COMMENTARY: I just looked it up, and as of today, Amazon.com has 15.3 million books in their catalog, of which 6.7 million are hardcover books. There are also 552,500 eBooks for their prized Kindle book reader. Somehow, I expect this those numbers to change drastically over the next five years.
In a blog post dated July 19, 2011, I profiled the demise of Borders Books. Here is some of the data for ebook readers and ebook content.
E-Book Reading Devices and E-Book Content Sales
Sales of e-book reading devices and digital books or e-books have taken a tremendous toll on the sale or hardcover books. Between 2008 and 2010, as the number of ebook reading devices increased, sales of e-book content increased, and hardcover book sales decreased three straight years.
eBook Reading Device Unit Sales
There are three major "pure" e-book reader manufacturers:
- Sony - In September 2006, Sony introduced the Sony Reader PRS 500. Borders Books was the first book retailer to sell it. Sony has since introduced eight newer models.
- Amazon.com - In November 2007, Amazon.com introduced the Kindle ebook reader. Amazon has since introduced three newer models.
- Barnes & Noble - In October 2009, Barnes & Noble introduced the Nook. In November 2010, the Nook was replaced by the B&N Nook Color. In June 2011, the Simple Touch Reader, a touchscreen e-book reader was introduced.
According to Caris & Co, Amazon.com sold 4.75 million Kindles in 2010, and projects 8.01 billion will be sold by 2012. According to Caris, combined Kindle readers and eBook revenues were $3.3 billion in 2010, will increase to $5.4 billion by 2011, then reach $8 billion in 2012.
Apple released the iPad tablet computer in April 2010, and sold 3 million of the devices in 80 days. In 2010, Apple sold 14.8 million iPads worldwide. The iPad is a full-fledged multi-media device, allowing users to read e-books, surf the Internet, watch videos and listen to music. In March 2011, Apple introduced the iPad 2, a thinner and more powerful replacement for the original iPad. In July 19, 2011, Apple announced that it had sold 9 million iPad's during the Q2 2011, more than all other tablet PCs combined. For the year 2011, it is expected to sell 27 million iPads, and take 83 percent of the tablet computing market share in the United States. Below are the projected 2010 e-book unit sales for Sony, Barnes & Noble, Amazon.com, Apple and miscellaneous Chinese e-book reader manufacturers.
eBook Reading Device Revenues
Sales of eBook readers began to takeoff in 2009. According to Yankee Group, $1.273 billion (at wholesale) in eBook readers were sold in 2010, and sales of eBook readers are expected to generate $2.5 billion by 2013.
eBook Content Sales
According to Yankee Group forecasts, U.S. consumers will purchase 381 million e-books by 2013, roughly four times the amount they purchased in 2010.
Average selling prices of e-books will plummet. In 2010, consumers saw e-book prices fall 50 cents. This trend will continue. By 2013, the average e-book retail price will fall to $7, down from an average of more than $9 in 2009.
Courtesy of an article dated September 12, 2011 appearing in The Wall Street Journal Technology
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