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Wednesday, 20 May 2009

The economics of the $9.99 ebook

The NYtimes wrote about the issues of the downward price pressure faced by the book industry as a result of the rising popularity of ebooks:

“I love Baldacci’s writing,” wrote one reader, who decided not to buy. “Sorry Mr. B — price comes down or you lose a lot or readers. I’ll skip your books and move on!”

Publishers, of course, object to the lower pricing, citing the reason that printing and shipping are not the main components of a book's costs.

publishers argue that those costs, which generally run about 12.5 percent of the average hardcover retail list price, do not entirely disappear with e-books. What’s more, the costs of writing, editing and marketing remain the same.

Within that paragraph lies the reason why traditional publishers will not survive the digital disruption. They have not change their operating structure to leverage on the new economics brought on by the Web. Each of the functions cited (writing, editing, marketing) should not be bundled within the same organisation. They should be replaced by light weight services that are loosely connected to each other. Only with such a structure can the $9.99 price point be sustain.

Beyond new structures, we will also see new genres or formats of books that are more light weight and easier to produce. These will enable authors to produce more books. The volume sales will potentially offset the decline in prices. This is what we are seeing in music and mobile applications.

Finally, book sales will likely be only part of an author's revenue. More and more, ancillary revenue sources will reduce the reliance on book sales. This BillBoard article, for example, examines what types of revenue are replacing the loss in CD sales.

The answer is a piecemeal collection of marketing and pricing strategies, multi-rights contracts and performance royalties paid to the owners of sound recordings. Also on the horizon are revenues from multi-rights contracts (currently immaterial but expected to be of consequence in a few years), in-house artist services, and acquisitions or market share gains in music publishing.

I suspect we will begin to see similar situation happening in the book industry, although it is too clear at the moment what are the ancillary revenues accruing to books.

$9.99 might be the new price point that authors have to contend with. The way forward is not be to fight this new price but to reinvent book publishing's value chain to align with this new economics.