Authors Can Be Stupid: Doing the Ebook Math

This post was written by Michael A. Stackpole. It originally appeared on his Stormwolf website on 2/7/10, is reprinted here in its entirety with his permission, and is the fifth installment in his series on common myths and distractions in authorship and publishing. The first installment is here, the second is here, the third is here and the fourth is here.

One of the things that keeps being bruited about in this discussion over digital books and pricing is a question of how much digital books really cost. The base cost of a book, of course, determines its final price. Repeatedly people have come out and said that the production costs of an ebook are fairly close to that of a paper book, so the prices need to be where they are. I want to break those numbers down.

In conventional publishing authors get a royalty of 10% of the cover price (on average). In the digital world, authors working through a publisher will get 25-50% of the publisher’s cut. Under the new Apple and Amazon models, that is 70% of the book’s cover price. The author, therefore, will get 17.5% to 35% of the cover price of the digital download.

In conventional publishing, the generally accepted cost for physical production of a book is 10% of the cover price. This number is a bit unstable because of volume discounts on printing and because of the returnability of books. For every book sold into a customer’s hands, two are printed. With digital publication, the actual production cost is negligible. The elimination of returns also eliminates the needs for the accounting dodge of reserves against returns.

In conventional publishing, physical books are sold into the market at a 50% discount off the cover price. Under the new digital models, that discount is reduced to 30%, so the publishers will be making an additional 20% of the cover price. (Yes, with an author’s percentage rising to 35% of cover for a digital sale, that increase is devoured, but the 10% physical production cost vanishes, leaving the publisher still 14.2% ahead.) (A $10 book at a 50% discount pays the publisher $5, and the author gets $1. The publishers gets $4, and then loses an additional dollar for the cost of the physical book, so they’re down to $3. A $10 digital book pays the publisher $7. After paying the author, they keep $3.50, so they’re over 14% better off with that digital sale.)

In conventional publishing, the remaining 30% covers everything from editorial, art direction and acquisition, warehousing, transportation, promotion, overhead and profit. If you’ve been following the math above, assuming that this 30% is fixed, the publishers are still 14.2% ahead through digital publication, and roughly 52% ahead if their authors have agreed to one of the shameful 25% of the digital take contracts that have been promoted recently.

The digital model, however, removes costs out of that 30%. Warehousing is no longer a cost. Transportation is no longer a cost. Typesetting is no longer a cost. Art direction is still a cost, but the cost of cover art goes way down. Digital books work well with iconic images, not the sweeping cover illustrations found on books. Even Michael Whelan does not reduce well to an icon. This might seem like an insignificant line item, but in the SF&F field, a cover illustration could cost more than acquiring the book. Going from even $1000 for a painting down to $100 for some graphics makes a significant difference in the profit picture.

Now, here’s the hidden, dirty little secret that the publishers don’t want you to think about. That 30% goes to zero for all of their backlist books. With those books, all the developmental costs have been written off years ago. Because digital books never go out of print, we suddenly have the return of the backlist. If a reader likes a book by an author and goes looking for more, they can find all of those books through a simple search or, if big publishers ever cotton on to this digital thing, through hotlinks at the back of the book.

In a previous post in this series, I’ve noted that the overhead category of charges, which some folks have suggested accounts for half of that 30%, is needlessly high for conventional publishers. Do they really need Manhattan offices? Baen Books and Night Shade Books seem to function perfectly well without them, just to name two publishers off hand. And the authors aren’t all located in New York. The internet is how I get my manuscripts to my publishers. And we have telephones, too. Moving the editorial and production offices out of Manhattan could significantly reduce overhead for any project.

Promotion is a sore point with authors. Publishers claim they do it. Authors find themselves encouraged to do more and more without any compensation. I have had my books solicited to stores including the fact that the author will do signings, but the publishers never set things up. I’ve had publishers refuse to pay $150 for a flight to Denver for a four store signing tour (the store chain manage got in touch with them, not me) because I wasn’t “on tour.” The lack of support and misplacement of advertising dollars is legendary in the industry; and authors are expected to pick up the slack on our own.

In the digital age, those promotion costs drop nearly to zero, consisting mostly of pages on the publisher’s website. If they do choose to do any advertising, at least it can be targeted to hit their audience by putting banners on author websites or online retailer websites.

Another point publishers don’t want anyone to think about is the cost of money. Publisher invoices are paid net 30 or net 60 (in one or two months). Authors are paid net 90 to net 270. A book sold on the last day of June won’t have a royalty sent to the author until, at the very fastest, the first of October. If the store pays the invoice for that copy on the last day of August, the publisher still has the money for thirty days. Often it is for considerably longer, and the interest earned on that money—which belongs to the author—is something the publisher retains. The current rate for a 6 month CD is 1.07%, or just over 2% per year. That goes neatly to the publisher’s bottom line.

Back to the cogent point: If every publisher today were to switch immediately over to the digital publishing model only, they would be 14-52% to the good on every new title they put out. They would be significantly better off with every backlist title they make available. If they just wanted to stay even, they could sell brand new ebooks at a 5% discount over the print price, and backlist books at 35% off. (Since most of the backlist books are currently out of print anyway, this becomes a new revenue stream for them, raising their overall volume, which, in turn, increases their profit because their cost of offering those books is zero.)

Industry insiders point out that there’s one flaw in this analysis: so few people are reading digital books, at this point, that if they were to make this immediate switch, there would not be enough volume to sustain the companies.

If that is true, however, how can traditional publishing’s suggestion that ebook sales are cutting into hardback sales be supported? It can’t and isn’t. They fear that it might, but there is no data to show that it has or will.

Moreover, and here is the trickiest thing, no one is asking them to do one or the other. We want them to do both. Since digital books produce a higher profit margin, increasing the digital offering only makes sense. In short, for every print book sale you don’t make because of a digital sale, you make more money! This is especially true of backlist offerings of the books to which they already own the rights. (I am repeatedly asked by books 3 and 4 of the DragonCrown War series are available as ebooks, but 1 and 2 are not? Beats the hell out of me. And why no omnibus digital edition? Another puzzler.)

Tradition publishing (and apologists for it) note that they want to control the transition because there are a lot of jobs at stake here—namely truckers and warehousemen. Does anyone actually believe that if a mobile robot that could pick books faster, tirelessly, without making mistakes; was available tomorrow, that every warehouseman wouldn’t be out on his ear? In a heartbeat. This isn’t to say that there are not plenty of compassionate people working for publishers—heck, working with authors requires the patience of a saint—but when it comes down to return-on-investment decisions, people become numbers, and numbers can be subtracted with amazing speed and facility.

The very important thing for authors to look at is this: the costs for you to offer your work as digital files is less than that of the publishers. A previously published short story already has the editorial work done. Converting the file for Kindle or epub takes less than an hour. Loading it to Amazon or your own website, less than an hour. Off Amazon you currently make 35% of cover, in July that goes to 70%, same as the big boys. Off your own website, you’ll pull at least 87% of cover.

My point to authors is the same as my point to publishers: I don’t think you should do one or the other, I think you have to do both. Just like the publishers owning rights to out of print, backlist properties that could make them money, authors have the same sort of inventory. Get it out there. Start selling. Establish your presence and encourage readers to buy direct from you.

Why?

The simple fact of the matter is this: traditional publishing has repeatedly evidenced an inability to integrate itself with technology to its benefit. Traditional publishers are fighting to maintain an inherently dysfunctional business model which has been in decline for years. If not for J. K. Rowling, Stephen King, Dan Brown and Stephanie Meyer it and the wasteful consignment-system of book retailing would have suffered a serious and perhaps fatal contraction seven years ago. Traditional publishers have repeatedly showed not only a lack of understanding of its customer base, but a contempt for them (as evidenced most recently by predatory pricing of ebooks). Last year’s attempt to cut author royalties in half on ebook sales, despite claims that the market for ebooks was insignificant, is yet one more indicator of publishers seeking to redress their inefficiencies by pulling more money from authors.

The traditional publishers themselves are going to give authors who do the work the very means with which the publishers can be supplanted. By setting ebook prices artificially high, they allow authors to offer the same quality entertainment at a reasonable price that actually nets us more. As I noted yesterday, I can take out a novel that New York didn’t want, do up in a digital version, and make seven times per book what they would pay me for the print version, and double what I’d get out of the digital version. With no downside for me at all. As I’ve noted before, using the Apple Appstore as an example, there is constant downward pressure on prices, and traditional publishers can easily find themselves competing with authors who offer their own backlists at reasonable prices.

The numbers don’t lie. Ebook prices should be lower than print prices, by a minimum of 5%, and that’s just if publishers wish to maintain the status quo. Operations where the costs of physical production, warehousing, transportation and editorial (in the case a backlist material) are reduced or eliminated, significantly increase their profit profile through reduced costs and the higher discount being offered on digital sales. In my estimation, ebook prices could be 20% below current print prices without causing any hardship, and significantly lower on backlist titles which would now be returned to availability. And they could go even lower if publishers addressed overhead costs and ran their companies more efficiently.

It’s not a matter of change coming. It’s already here. How you decide to deal with it will determine where you and your career are in fifteen months and fifteen years.

[Publetariat Editor’s Note: if you’ve found this piece interesting, you might like to take a look at, and participate in, the discussion going on in the comments thread of the original post on Michael A. Stackpole’s website.]

©2010 Michael A. Stackpole

Michael A. Stackpole is a New York times Bestselling author with over forty novels published including I, Jedi and Rogue Squadron. He was the first author to have work available in Apple’s Appstore. He has lectured extensively on writing careers in the Post-paper Era and is working on strategies for authors to profit during the trying time of transition.

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