Why Ebooks Must Fail
*This article was first published by Evan Schnittman on the 30th of March 2009
NB – I have noticed from the amazing amount of commentary this post generated over the last two weeks that there seems to be a misunderstanding of my intentions here. Granted, I chose a very inflammatory title, but this article, especially when taken in context with the follow-up piece Discounts Must Align to Risks, is about supporting growth in the ebook market, not predicting its demise. Ebooks are the future and getting there as an industry will require some hard evaluation of how things work and a better understanding of publishing economics.
This piece is about consumer or “trade” publishing as we call it in the industry. To begin, let’s review how a book becomes a book. A writer gets an agent who peddles a manuscript to an editor who buys the book. The Publisher then pays an advance against the future royalties. (N. B., trade books advances are often, if not nearly always, greater than the actual royalties earned.) The publisher edits, designs, produces, prints, binds, warehouses, and finally, distributes the book to resellers (retailers and wholesalers). Concurrently the publisher is out pre-selling in an attempt to get as many units shipped to resellers as possible.
Of all the work cited above, there are two, large-scale, out of pocket investments made by the publisher to create a trade book, the advance and the manufacturing. Advances should be viewed as controllable expenses, but in the competitive world we live in (well, used to anyway), Publishers outbid each other on a regular basis to get the rights to a title. Think of its as sports fans think of free agency (in the US) or transfer fees (in Europe) – everyone thinks they are outrageously high but short of colluding, there seems to be no way to control them.
As to the manufacturing costs, most publishers have spent the last decade focused on systematically driving down costs in manufacturing. However, no matter how much efficiency is achieved, there is only so much that can be driven out of any process that requires skilled people and non-renewable materials. The impact of advances and Manufacturing is frontloaded in the economics of book publishing. In other words, before a single dollar is earned, these costs hit the publisher. This has been the way publishing has worked for more than 100 years.
So how do publishers manage this difficult economic situation? We work extra hard to frontload sales by focusing marketing efforts on front list titles (Front list means this years new titles, as opposed to backlist which means everything publisher prior to this year). Big advances (in this sense meaning lots of orders in advance of the shipping date) drive up the number of copies shipped, which is when publishers “count” the income for a book – when it is shipped from the warehouse. However, savvy readers will notice a chink in the armor – books shipped do not mean books sold.
Trade books are pre-sold in far, far larger quantities than they will actually sell in a given period of time. In fact, the bigger the title, the greater the ratio of advance to sold units. The more copies advanced, the more it will sell – but the efficiency of sales falls as the number of advances copies increases. It’s a bedeviling issue for publishers as we generally sell front list to resellers on a returnable basis.
Trade publishing economics is predicated on the ability of retailers to mitigate their risk and return unsold inventory for full credit. (NB, not all retailers are designed this way – but the majority of bricks and mortar retailers in particular, are… especially the big box stores such as Costco who take huge positions on a relative handful of titles). So the publishers are in a funny position. To get top authors, they bid against each other and drive publishing costs through the roof. To recoup this investment, they have to pre-sell very hard and get too much inventory out onto the market, in order to bring in the cash to cover the investment. Then after some time, the unsold inventory comes back for credit, which forces us to publish more books in order to sustain our position! The cycle is never-ending and sounds all too similar to certain less than legit investment portfolios featured in recent headlines.
So what does all of this have to do with ebooks?
Well, for starters, ebooks don’t follow these rules. Ebooks are effectively sold on a consignment basis – meaning the money for the sale is distributed after the sale is made, not up front. Stores don’t buy inventory, they put the file in a database and distribute copies as they are sold. This means that ebooks don’t have a huge returns problem, but it also means they cannot generate short-term cash flow like print books do.
Furthermore, when you look at the pricing models that trade ebooks have engendered in the market, you see that publishers have allowed pricing to be controlled by forces that are looking to control over an emerging market rather than those who need to fund the content creation. Ebooks (at best) are selling for less than 50% of the hardcover price – often at 35-40%.
On the other hand, ebooks don’t carry the same costs of print books. There are clearly no manufacturing or printing costs. However, publishers still have to buy the rights to a book no matter if that is an ebook or a print book – paying advances against royalties. There is still the need to edit, design and produce the content. In fact, many think that there are greater development costs for ebooks as electronic media opens the work to connections to the world of the web and an incredible amount of related and enhancing content – all of which needs to be managed and edited.
Ebooks will still have to be sold and marketed, just in different ways as there will be far less reliance on an upfront advance buy-in, but far more reliance on ongoing marketing through the use of content and metadata – as well as user-generated content and promotion tools to get the book marketed. These are completely new expenses for publishers who traditionally think of marketing as publicity and display advertising for new books, not ongoing support and marketing for long-term sales.
Finally, the content and its metadata all need to be warehoused electronically which requires investment in technology and staff to manage the technology – be they in-house or a third party entity. Clearly ebooks aren’t free – they are perhaps as expensive or in some cases more expensive than print – yet they do not create large, short term cash flow to cover their costs. Ebooks, if successful, will sink the trade publishing industry.
And therein lies the dilemma… how does the publishing industry fund the creation, editing, design, production, marketing, e-warehousing, and sales of ebooks, if the income isn’t there? How do ebooks cover the huge advances needed to buy books if we cannot generate the cash, especially at their extremely low, discounted prices, cover the advances that an entire industry has come to require? The answer is that ebooks, alone, cannot.
What this means is that unless a very different model evolves, ebooks can never become the dominant version of content sold by book publishers. It means that ebooks will always be priced to sell, but sold as an afterthought, not as the primary version of a work. It means that the need for blended e plus p models will evolve, in order to take advantage of all the great qualities of ebooks, while providing the financial support and structure that print offers. It means that consumer ebooks, as a stand-alone version of an intellectual property, must fail.
In a future post, I will explore potential models that address the issues explored above… one such model even enables us publishers to have our Ponzi scheme and ebooks too!
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