A friend of mine referred me to a blog post today on “Why Some E-books Cost More Than The Hardcover” by Nathan Bransford.
The article is worth reading because it explains why an e-book can now cost more than a p-book (a paper book). It shows how, until about a year ago, Amazon actually sold some e-books at a loss in order to gain market share. At that time, Amazon would buy an e-book at a wholesale price that was typically 50% of the retail price set by the publisher. Then Amazon would sell the e-book at $9.99, which in some cases cost them several dollars per book.
When Apple announced the iPad and the associated iBookStore, they promised to sell books on an “agency model” in which the publisher would set the retail price and Apple would sell an e-book for that exact amount and then pay the publisher 70% of that price, keeping 30% for itself.
Soon after Apple made this announcement, Amazon made the agency model an option for e-books. 5 of the 6 major US publishers took the agency model option then, and now all of them use this model.
Amazon still sells paper books using the wholesale model, while selling e-books using the agency model. This can lead to cases where the hardcover edition of a book on Amazon is about the same price as the e-book (or possibly even cheaper).
Bransford backs this up with some calculations, but the results are misleading because in most cases, the assumptions are incorrect. Quoting from the article:
Well, here’s the thing that’s kind of wacky about the wholesale model vs. the agency model: the publisher made more money per copy with the wholesale model.
Again, napkin math for a $24.99 hardcover. Let’s say the e-book would have sold for $9.99 at Amazon in the old days but now the publisher charges $12.99:
Wholesale model e-book:
Publisher: $12.50 (roughly 50% of $24.99 hardcover retail price)
Amazon: – $2.50 (selling at $9.99)
Agency model e-book:
Publisher: $9.09 (70% of $12.99)
E-bookseller: $3.90 (30% of $12.99)
Randy sez: The napkin math would be correct, if its napkin assumptions were correct. But one of those assumptions is usually wrong. E-books are NOT usually assigned the same retail price as a hardcover these days. E-books are usually assigned a retail price no higher than the retail price of the trade paper edition, which is typically close to half the retail price of the hardcover.
[Note added on 3/15/2011 as a result of a comment left by Nathan: Even when there is no trade paper edition of a book, the e-book version is generally sold at a price point no higher than a typical trade paper book. I looked at today’s Amazon Top 100 Kindle list and found only 3 e-books priced as high as $14.99. A few were at $12.99 or $11.99. Most were at $9.99 or less. I can’t recall seeing any recent e-book on Amazon in which the retail price for the e-book was anywhere close to the retail price for the hardcover. There are some cases where the retail price for the e-book is about the same as the heavily discounted price for the hardcover, but the retail price for that hardcover is close to twice the retail price of the e-book.]
Let’s wipe off that napkin and do the math again and let’s also figure in the author’s cut, assuming 25% of the publisher’s net, which is the absurd standard royalty these days:
The hardcover price is $24.99 and the trade paper price is $12.99. We’ll assume the e-book price also gets a retail price of $12.99.
Wholesale model e-book:
Publisher: $6.50 (50% of the $12.99 e-book retail price)
Amazon: $3.49 (selling at $9.99 and paying $6.50 to the publisher)
Author: $1.30 (25% of publisher’s take of $6.50)
Agency model e-book:
Publisher: $4.55 (35% of the $12.99 e-book retail price)
Amazon: $8.44 (selling at $12.99 and paying $4.55 to the publisher)
Author: $1.14 (25% of publisher’s take of $4.55)
[Note added 3/15/2011: This is a revision of figures I showed in the original post, where I was using a 70% royalty rate. An alert reader reminded me that Amazon pays only 35% to the publisher for e-books priced above $9.99.]
Clearly the agency model benefits Amazon, costs the publisher and the author, and screws the consumer, who ends up paying $3.00 more for the book and therefore ends up buying 23.1% fewer books because if the consumer has a fixed number of dollars, those dollars will only buy 9.99/12.99 as many books at the higher price point.
That reduction in sales volume needs to be accounted for too. The simplest way to do that is by subtracting 23.1% from the Agency model computations:
Publisher: $3.50 (76.9% of $4.55)
Amazon: $6.49 (76.9% of $8.44)
Author: $0.87 (76.9% of $1.14)
Comparing these to the wholesale model for books priced at $9.99, we see that the publisher and the author come out behind and Amazon comes out ahead.
However, the story changes pretty dramatically when we look at the agency model for books priced at $9.99, where the publisher’s royalty rate goes up to 70%:
Publisher: $6.99 (70% of $9.99)
Amazon: $3.00 (selling at $9.99 and paying the publisher $6.99)
Author: $1.75 (25% of the publisher’s take)
This is why most of the e-books on Amazon are priced at $9.99 or lower. The publisher does considerably better at this price point than it does at higher prices. [Amazon’s royalty is 70% for price points between $2.99 and $9.99. The royalty is 35% for all other price points. The last time I checked, the 70% royalty was paid by Amazon US only for sales to US customers; it was 35% for sales outside the US. I have not checked on royalties paid by Amazon Canada, or Amazon UK. The situation, as you can see, is complicated, and of course it is subject to change.]
What is missing here is the same set of calculations where the author self-publishes the book and prices it at $2.99, where it will sell many more copies because it is now an impulse buy:
Publisher: $0.00 (because the publisher is out of this picture)
Amazon: $.90 (30% of the price of $2.99)
Author: $2.09 (70% of the price of $2.99)
Assuming the consumer will now buy 3.341 times as many books as the wholesale model priced at $9.99 (this is just 9.99/2.99 and it assumes that the consumer only has a fixed number of dollars to spend on books and will spend them on as many books as possible), the real advantage to the author becomes clear:
Publisher: $0.00 (because the publisher is still out of the picture)
Amazon: $3.00 (3.341 times $.90)
Author: $6.99 (3.341 times $2.09)
It should be clear that low-priced e-books with an agency model massively benefits the author and the consumer (as compared to the wholesale model priced at $9.99), slightly costs Amazon, and massively crushes the publisher.
This is why we call the thing happening right now a “revolution.”