Ebooks Econ 101

For years, books have made money for publishers, agents, and even writers. Now it’s only a slight exaggeration to say there remains money only for publishers and a bevy of writing stars. The following very short course in the new economics of book publishing will bear out this claim. The numbers contained here have important implications for the health of the writing arts. So stick with me.

In the past, when a publisher brought out a $30 hardcover book, it could expect to receive on average no less than $15 a copy from its sale to bookstores, wholesalers, and others. The editing, design, typesetting, printing, storage, and shipping of the book consumed a little more than $4. If the publisher believed the book had promise, then another $1 might be spent on marketing. The royalty paid to the author accounted for somewhere between $3 and $4.50. At the end of the day, the publisher was left with between $5.50 and $7 to pay for its overhead and to reward its stockholders.

This same calculation is very different when it comes to ebooks. First, because consumers are convinced that ebooks, devoid of all those pesky manufacturing costs, must be considerably less expensive to produce, publishers are pressured to keep the price low. For instance, when Little, Brown and Company brought out Donna Tartt’s bestselling The Goldfinch, it priced the hardcover at $30 and the ebook at $14.99.

At $14.99, a publisher can expect to receive on average $10.49 from an ebook. The manufacturing costs, now absent printing and shipping, are negligible and absorbed into overhead. Marketing costs, again only if the publisher thinks it worthwhile, remain at $1. But in splitting this smaller pie, publishers have successfully stipulated a lower royalty rate for ebook sales, giving the author somewhere around $2.60. Thus, in comparison to its $5.50 to $7 take on a hardback, publishers can count on no less than $6.89 on an $14.99 ebook and usually earn far more. At first glance, the lower royalties may seem similar to that provided by paperback editions of a book. However, ebooks are replacing paperbacksand taking an increasing share of hardback sales.

One major publisher was glad to share the good news with investors without any worry about how authors might react when they saw the new equation. At “investor day” during the 2013 BookExpo America, the head of HarperCollins proudly showed a slide demonstrating not only the increased profitability of ebooks but also that the allocation for authors could be decreased. In short, technology could be used as an opportunity to alter a publisher’s economic relationship with its authors.

Brian Murray, the CEO of HarperCollins (I am one of the company’s authors), explained that his firm was paying on average royalties of $4.20 a copy on hardcover books but only $2.62 on ebooks. The firm was able to cut both its manufacturing costs and its royalty payments.

As one might imagine, the Authors Guild (of which I am a member) believes this move violates the historic relationship between writers and publishers. The relationship was traditionally one of partners that essentially split the net proceeds from books sales. “But trade book publishers currently offer ebook royalties at precisely half what the terms of a traditional proceeds-sharing arrangement would dictate — paying just 25% of net income on ebook sales,” Guild executive director Paul Aiken told members in a blog post. “That’s why the shift from hardcover to ebook sales is a win for publishers, a loss for authors.”

Of course, publishers are quick to point out that a lower price on books should mean higher sales. In some cases, that has been true. But, on the whole, the reward of higher sales has gone to well-known authors. In fact, big-name writers are raking in larger advances than ever before. But in the book world they are like the 1 percenters of society. The income for the remaining 99 percent of writers is stagnant, if not declining. The new world of ebooks may provide a greater variety of books more inexpensively and delivered at lighting speed, but as now construed it could irreparably damage the creative segment of the industry — its authors.

First, moving from the sale of expensive hardcover books to ebooks lessens and may eventually eliminate the important and often unappreciated role the hardback played in the development of our nation’s writing community. The income from hardbacks, while enriching publishers, created the capital that permitted editors to support a large cadre of developing writers through the payment of advances. Not too dissimilar from Minor League Baseball, publishing has maintained its own farm system in what are called midlist books. These were books that sold modestly but by authors who might produce the next bestseller and were worth supporting.

The difference between the advance and the eventual earnings from the book was cushioned by the high per-book royalty as well as the money generated by those that did become bestsellers. The hardcover permitted editors to be the Medicis of literature.

Second, when writers hear from their agents that “$5,000 is the new $50,000 advance,” it is not they alone who feel the pain. With every decline in the earnings of authors is a commensurate decline in the money agents earn. If editors had been literary Medicis, then agents were key members of the court guiding the benefactors in their largesse.

Third, the ominous tones from the lesson learned by the music industry when it underwent a similar digital transformation may forecast the future of writing. In 2009, novelist William Landay presciently noted “emerging young musicians in the brave new world of digital music can’t earn a living by recording anymore. They give away their MP3s and survive by touring constantly (an option not open to writers: there is no market for our live performances, understandably).”

As a result, Landay wrote, the availability of quality music, as well as the number of new musicians, has declined. “The musicians may be out there, but you won’t find them on iTunes, not easily anyway. There is limited space on the landing page of the iTunes store, so most of those prime pixels go to established acts.”

All of this may well sort itself out in time so that authors have a stronger economic footing. But if it doesn’t, a future in which only the rare few can earn a living writing is one in which reading will suffer.

“Many people would say such changes are simply in the nature of markets, and see no problem if authors are left to write purely for the love of the game. But what sort of society would that be?” asked novelist Scott Turow in a New York Times op-ed written after returning from Russia. “As a result, in the country of Tolstoy and Chekhov, few Russians, let alone Westerners, can name a contemporary Russian author whose work regularly affects the national conversation.” ◀

(1) comment

Mark Curley

What comes to mind is: Why have publishers at all then? What do they provide now that actual book manufacturing, storage, and distribution is out of the equation? Typesetting and editing and (if they like you) marketing?

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