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.”
Would you consider epublishing your next work, Randy?
Randy sez: I will soon be rereleasing all my out-of-print novels as e-books over the next several months. If those work out as expected, I have some e-book originals planned. Stay tuned…
Cori Fedyna says
Thanks Randy for the heavy number lifting. The ROI for us less math oriented is invaluable, because it would have taken 3.341 times longer to arrive at this analysis. LOL
Edwin D Ferretti III says
I read Mr Bransford’s article and wondered what a successful (eBook) self published author did to his model. His two previous posts covered this topic and he failed to tie the two together. Like you, I see a revolution in progress, one that will eventually take the eBook out of the traditional publisher’s hands, especially for authors who own the rights for their previously published books.
Over the past year I have read several offers from new emerging eBook only publishers, who state they will publish your book in multiple formats (Kindle, Nook, Sony E-reader, to name a few). The return for the author is 70% of the price you set. With the free apps of the buy-it-now button an author can direct sell his/her books from their Blog, Web and Facebook sites, etc. I also see a time approaching when agents will eagerly seek out successful eBook authors with a new contract for printed books only.
Alastair Mayer says
The Big Six may have enough clout with Amazon to get a different deal on e-book pricing, but as far as I know a $12.99 e-book is only going to get the publisher 35%, not 70%. Amazon limits the 70% rate to e-books priced between $2.99 and $9.99.
A publisher gets less money per copy selling at $12.99 than at $9.99. Two reasons they may price ebooks higher: 1 – the prices are set by different divisions within the publishing house (the left hand vs right hand problem); 2 – the publisher doesn’t want ebook sales to cannibalize their paper sales. Publishers are slowly catching on to the idea that the latter doesn’t make much sense if they can make more money off the ebooks.
Setting the best price for ebooks to balance the trade-off between volume and per-copy royalty is still a black art, as far as I can tell.
Randy sez: You are correct! My mistake. I knew that but simply forgot it when doing my analysis. I’ll try to correct my numbers shortly.
I read Nathan’s blog religiously and nearly had a stroke when I read this article. Even with Randy’s recalculations I feel the left side of my body going numb…it never ceases to baffle me how much the writer gets screwed when it comes to getting paid for their efforts. Good thing I’m not in this for the money!
Yikes, this is pretty scary stuff. Well, maybe not scary. An unrestricted free market in the arts is pretty chaotic though. I can’t imagine what fiction will look like without a publishing industry.
Daniel Smith says
Brilliant. I confess I skimmed Nathan’s blog and it didn’t quite make sense. You’ve explained what I picked up on intuitively. Thanks!
Nathan Bransford says
My example was for a new hardcover/new e-book, not one with a trade paperback edition available. Not sure why it’s being compared to one with a trade paperback edition available?
Randy sez: I believe you’ve misread my article. My point is that these days, books that are available in hardcover may carry a retail price of $24.99, but the corresponding e-book will NOT. This is true, whether there is a trade paper version or not. If you look on the Amazon Top 100 Kindle list, you’ll find a very few e-books priced as high as $14.99. (I counted 3 today.) You’ll find a few others priced as high as $12.99 or $11.99. But the vast majority are priced at $9.99 or lower. I suppose there may be a few e-books on Amazon with a retail price identical to the retail price of the hardcover, but I can’t remember when I last saw one. The purpose of my article was to compare the actual revenue coming to the publisher/Amazon/author at current price points.
Sheila Deeth says
Great to see the math and the assumptions. Thanks.
J.A. Marlow says
I see someone else beat me to pointing out that a price point above $9.99 is a 35% royalty rate. The big guys might have made a better deal with Amazon. Although, Amazon was ticked off enough when the Agency Model was shoved down their throats that they might not. Somehow I doubt the big publishing houses will be willing to release the details of the terms of their agreements.