The Economics of [Self-Published] e-Books
From Daniel James Arnzen at Wrightly Done:
A quick Google search on “economics of ebooks” will result in a mix of articles either espousing gloom and doom for the book publishing industry, or discussing the unfairness of e-book pricing. Most of the discussion focuses on comparing e-books to printed books. This is not a valid comparison because the economics are completely different.
The music industry has gone through several transitions in the past. There are two transitions I want to focus on: the transition from cassette (analog) to CD (digital), and the transition from CD (physical) to MP3 (virtual). When music went from being distributed in analog format to digital there was fear that the ability to make perfect copies would kill the industry. This didn’t happen; however, the transition to MP3 and down-loadable music has been very disruptive. This is because the industry had been optimized over many years for the economics of the physical distribution of recorded music. The technology resulted in large changes in the behavior of consumers, which changes everything. Years later, the music industry continues to adapt to these changes.
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Book publishing is making a bigger transition. Digitization and virtualization are occurring simultaneously. It is more like going from cassettes (or even LP’s) to MP3′s directly. This results in a lot of turmoil. No one knows how this will change the behavior of the consumer, and the existing infrastructure is trying to maintain the status quo on how business is done.
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At first glance, the law of supply and demand seems to destroy e-book pricing. Most people understand that increasing supply will drive prices down. The supply is infinite, right? There will never be a line out the door to get the first copies of a best seller. Everyone is guaranteed a copy. Shouldn’t this drive prices to zero? This is a misunderstanding of how “supply” is used in economics. Supply isn’t an inventory quantity. Supply is the amount of product the seller is willing to sell at a given price keeping all other factors constant. If something costs me $40 to produce, I’m not willing to sell it for < $40 or I’ll lose money. Normal (physical) products have a cost associated with each unit produced; the cost of making one additional unit is referred to as the marginal cost.
E-books have a distorted supply curve because the marginal cost is very small; however, there is a substantial fixed cost, or cost to produce the first copy. Regardless of how many copies are sold, the production costs stay the same. The fixed cost ends up being amortized (shared) over the number of books sold. So returning to the supply question; if an e-book costs you $1000 to produce, how many copies would you be willing to sell at $1000? That’s easy, as many as you can! After the first copy, every additional sale is pure profit. Ok, but there’s a hitch, it is unlikely you will sell a single e-book at $1000. There’s no demand at that price. The correct way to look at it is what is the minimum number of sales you would be willing to make at a given price. What about $1? In order to make any money, you would have to sell at least 1000 copies to make a profit. E-book pricing is demand limited; which is kind of obvious.
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When demand is limiting the price, it is considered a buyer’s market. Prices are set based on how much a buyer is willing to pay. How can you know how much someone is willing to pay for an e-book? I think there’s already a lot of history on this looking at the existing book market. People are willing to pay $5-$10 for back-list and $15-$25 for a new release. Notice how I didn’t say “paperback” and “hardcover.” Most people who buy hardcover books are not paying the premium for the big bulky book to sit on a shelf. They are paying for the new content that is unavailable in any other form.
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As with the music industry, the changing habits of the consumer will have the biggest impact. How do people consume e-books? I know I find e-books to read differently than I did print books. I don’t randomly browse anymore by wandering aisles. I buy new releases from authors I enjoy, I buy recommendations, and I’ll sample material in genres I like from unknown authors. Some people may spend hours sifting through thousands of self-published e-books looking for gold, but I don’t. I use community reviews and the internet hive mind to narrow my search. With no supporting data, I’ll say I’m a typical e-book consumer.
Link to the rest at Wrightly Done