Economics of Ebook Prices

A Background story first:

Until July 2010, I never read books.  Something had to be so compelling that I had no choice but to read it.  That isn’t to say that I’m uninformed, but as the 1% goes, I didn’t want to waste my time.  I would read blog sites and news aggregators almost exclusively.  All of a sudden I went on a cruise, and was disconnected from everything except my mothers sony ereader.  I put things I knew I would like, such as Harry Potter books 6 & 7 and Malcolm Gladwell’s writings.  I came back and didn’t want to put the ereader down.  I put my smart phone down and was reading more and more.  I decided I should buy a kindle.

When the Kindle came out in 2007 (I’m probably wrong), all best sellers were $9.99.  Going to Barnes and Noble or searching on Amazon.com that seems like a fair price point.  Most hardcovers were going for $19.99 and paperbacks for $12.99.  Again the price seemed fair for a digital copy.  It was cheaper to produce (no cost overhead), and there was an incentive to buy the digital copy.  Remember Amazon and now the other manufacturers have to convince people to buy their hardware (overhead cost) before they can get the discount.  This model held until the iPad came out in March of 2010 when Apple told publishers they can charge whatever they want.  This is when the problems started.

The publishers were now able to charge whatever they wanted.  Amazon, to compete, had to cave into their demands.  Their demands were simple.  MOAR MONIEZ.  Publishers were able to set their own ebook prices, while bookstores were allowed to charge whatever they wanted created the problem of the ebook costing more than the hardcover.  If you look at a recent hardcover book, the MSRP cost is $25 or more.  Amazon and B&N obviously don’t pay that much for it; they mark it down.  B&N marks best sellers down 20%, and Amazon is able to reduce it even more.  A $25 book may cost $14.99 or less.  The ebook price however, set by the publisher, is rising to between $12.99 and $14.99.  Again an ebook with $0 production cost.  The price increase of the ebook is not the problem,  it is more of the short sightedness of the publishers to slide the price based on demand and (actual retail) cost.

Ken Follet’s Fall of Giants: (Pops)

Original Hardcover Price:      $36.00 (which nobody pays)
Amazon Price:                           $18.62
Barnes and Noble:                    $18.80
Kindle Price:                               $19.99
Nook Price:                                 $19.99

Malcolm Gladwell’s What the Dog Saw: (Pops)

Original Hardcover Price:      $27.99 (which nobody pays)
Paperback:                                  $16.99 (which nobody pays)
Amazon Price(paperback):    $10.19
Barnes and Noble:                    $10.39
Kindle Price:                               $14.99
Nook Price:                                 $14.99

In both cases the ebook price is 50% the cost of the hardcover.  If I told you that you can get a book for 50% off the cover price by getting it digitally you would jump on it.  As soon as you hit buy, you realized you are being scammed.  We are being scammed.

Reading other blog posts on why publishers are having a hard time at the $9.99 price point they continually use rhetoric that it costs more than we think.  Marketing, distribution, printing, and research are the big 4 costs.  Coincidentally,the first three expenses, the ebook cost is nothing.  You will never get 100% ebook readership, so aggregate the cost of the promotion to all mediums.  What does it matter to the author or publisher how the person buys the book.  Royalties are the same for all mediums, so are promotional costs.  Putting an author to sign copies only guarantees physical books are being sold.   I don’t want authors signing my kindle (hmm… not a bad idea).

Another thing that authors union is complaining about are libraries.  Ebooks prevent the use of sharing for the most part.  After long concessions I am now able to share a book once to a friend (not all books).  So that person is going to have to buy it themselves.  This is another hidden cost for the consumer and a unrealized gain for the publisher (and author).  And as the RIAA and MPAA are finding out, making it hard for people to get content means people will pirate.  Make prices cheaper and people won’t pirate.  I understand NYTimes bestsellers are obviously popular and should cost more, but older books can be priced down.  The long tail of retail theory still works here.

Suggestions:
I can’t complain without offering suggestions. (I can because it is my blog).
Understand supply and demand.  Adjust prices based on demand, but don’t be stupid.  Adjust prices based on actual, realistic cost.  Prices should be 30%-40% less than the paperback.  Adjust prices as such.  Owners of ebooks should realize that you bought the ebook for the convenience (why I bought it).  Start realizing that books won’t cost $9.99, but should be less (by some amount) than their dead tree counterpart.