Why Ebooks Must Fail

NB – I have noticed from the amazing amount of commentary this post generated over the last two weeks that there seems to be a misunderstanding of my intentions here. Granted, I chose a very inflammatory title, but this article, especially when taken in context with the follow up piece Discounts Must Align to Risks, is about supporting growth in the ebook market, not predicting its demise. Ebooks are the future and getting there as an industry will require some hard evaluation of how things work and a better understanding of publishing economics.

Evan

This piece is about consumer or “trade” publishing as we call it in the industry.  To begin, let’s review how a book becomes a book. A writer gets an agent who peddles a manuscript to an editor who buys the book. The Publisher then pays an advance against the future royalties. (N. B., trade books advances are often, if not nearly always, greater than the actual royalties earned.) The publisher edits, designs, produces, prints, binds, warehouses, and finally, distributes the book to resellers (retailers and wholesalers). Concurrently the publisher is out pre-selling in an attempt to get as many units shipped to resellers as possible.

Of all the work cited above, there are two, large-scale, out of pocket investments made by the publisher to create a trade book, the advance and the manufacturing.  Advances should be viewed as controllable expenses, but in the competitive world we live in (well, used to anyway), Publishers outbid each other on a regular basis to get the rights to a title. Think of its as sports fans think of free agency (in the US) or transfer fees (in Europe) – everyone thinks they are outrageously high but short of colluding, there seems to be no way to control them.

As to the manufacturing costs, most publishers have spent the last decade focused on systematically driving down costs in manufacturing. However, no matter how much efficiency is achieved, there is only so much that can be driven out of any process that requires skilled people and non-renewable materials. The impact of advances and Manufacturing is frontloaded in the economics of book publishing. In other words, before a single dollar is earned, these costs hit the publisher. This has been the way publishing has worked for more than 100 years.

So how do publishers manage this difficult economic situation? We work extra hard to frontload sales by focusing marketing efforts on front list titles (Front list means this years new titles, as opposed to backlist which means everything publisher prior to this year). Big advances (in this sense meaning lots of orders in advance of the shipping date) drive up the number of copies shipped, which is when publishers “count” the income for a book  – when it is shipped from the warehouse. However, savvy readers will notice a chink in the armor – books shipped do not mean books sold.

Trade books are pre-sold in far, far larger quantities than they will actually sell in a given period of time. In fact, the bigger the title, the greater the ratio of advance to sold units. The more copies advanced, the more it will sell – but the efficiency of sales falls as the number of advances copies increases. It’s a bedeviling issue for publishers as we generally sell front list to resellers on a returnable basis.

Trade publishing economics is predicated on the ability of retailers to mitigate their risk and return unsold inventory for full credit. (NB, not all retailers are designed this way – but the majority of bricks and mortar retailers in particular, are… especially the big box stores such as Costco who take huge positions on a relative handful of titles). So the publishers are in a funny position. To get top authors, they bid against each other and drive publishing costs through the roof. To recoup this investment, they have to pre-sell very hard and get too much inventory out onto the market, in order to bring in the cash to cover the investment. Then after some time, the unsold inventory comes back for credit, which forces us to publish more books in order to sustain our position! The cycle is never-ending and sounds all too similar to certain less than legit investment portfolios featured in recent headlines.
So what does all of this have to do with ebooks?

Well, for starters, ebooks don’t follow these rules. Ebooks are effectively sold on a consignment basis – meaning the money for the sale is distributed after the sale is made, not up front. Stores don’t buy inventory, they put the file in a database and distribute copies as they are sold. This means that ebooks don’t have a huge returns problem, but it also means they cannot generate short-term cash flow like print books do.

Furthermore, when you look at the pricing models that trade ebooks have engendered in the market, you see that publishers have allowed pricing to be controlled by forces that are looking to control over an emerging market rather than those who need to fund the content creation. Ebooks (at best) are selling for less than 50% of the hardcover price – often at 35-40%.

On the other hand, ebooks don’t carry the same costs of print books. There are clearly no manufacturing or printing costs. However, publishers still have to buy the rights to a book no matter if that is an ebook or a print book – paying advances against royalties. There is still the need to edit, design and produce the content. In fact, many think that there are greater development costs for ebooks as electronic media opens the work to connections to the world of the web and an incredible amount of related and enhancing content – all of which needs to be managed and edited.

Ebooks will still have to be sold and marketed, just in different ways as there will be far less reliance on an upfront advance buy-in, but far more reliance on ongoing marketing through the use of content and metadata – as well as user-generated content and promotion tools to get the book marketed. These are completely new expenses for publishers who traditionally think of marketing as publicity and display advertising for new books, not ongoing support and marketing for long-term sales.

Finally, the content and its metadata all need to be warehoused electronically which requires investment in technology and staff to manage the technology – be they in-house or a third party entity. Clearly ebooks aren’t free – they are perhaps as expensive or in some cases more expensive than print – yet they do not create large, short term cash flow to cover their costs. Ebooks, if successful, will sink the trade publishing industry.

And therein lies the dilemma… how does the publishing industry fund the creation, editing, design, production, marketing, e-warehousing, and sales of ebooks, if the income isn’t there? How do ebooks cover the huge advances needed to buy books if we cannot generate the cash, especially at their extremely low, discounted prices, cover the advances that an entire industry has come to require? The answer is that ebooks, alone, cannot.

What this means is that unless a very different model evolves, ebooks can never become the dominant version of content sold by book publishers. It means that ebooks will always be priced to sell, but sold as an afterthought, not as the primary version of a work. It means that the need for blended e plus p models will evolve, in order to take advantage of all the great qualities of ebooks, while providing the financial support and structure that print offers. It means that consumer ebooks, as a stand-alone version of an intellectual property, must fail.

In a future post, I will explore potential models that address the issues explored above… one such model even enables us publishers to have our Ponzi scheme and ebooks too!

62 Replies to “Why Ebooks Must Fail”

  1. Every discussion I have seen on this topic totally ignores an important factor. I buy a TON of older books in second hand stores and yard sales, and almost never buy books in a bookstore, but would be interested in having them on a reader, and so revenue that was formerly going elsewhere would be going to the people who actually produced the books. Keep charging new book prices for books I bought a decade ago for a quarter? No way. 1/2 price & I’d consider it to get books on a reader. & many of the ‘benefits’ of the reader don’t apply to folks like me…saving trees…nope, somebody else already bought the book…convenience? Sure, if I’m not on a boat, at the beach, camping, or by the pool. I know a lot of people who buy books as I do. So do ya want our money, or should we keep giving it to others?
    Oh, as a side note, my mother buys a huge # of new books, & I have noticed the quality of the printing, design, cover art, and binding has been awful in the last 10 years. I still have books from my childhood in perfect condition, while books she got last month can’t survive 1 or 2 readings. Score 1 for the ebook.

  2. “What this means is that unless a very different model evolves, ebooks can never become the dominant version of content sold by book publishers.”

    Indeed. As others have pointed out, new models are already emerging, they’re just not being adopted by the Big 6 dinosaurs. You identified very well what the essential economic differences are between print books in brick-and-mortar stores and ebooks sold on line: essentially zero production and distribution costs, no front-loaded revenues. That suggests changes to the current model in terms of production, marketing, payment to authors, and relationships with vendors.

    For production, ebooks demand the same as print books in terms of writing, editing, and proofing, but nowhere near the same in terms of other things that go into making an attractive printed book. Fonts aren’t important (the reader can change the font anyway). Copy style isn’t important. Page layout isn’t important. Book cover is still important but not AS important as it is in print, because the book isn’t going to serve a decorative purpose; all the cover does is attract reader interest to start with. So while some of the core up-front costs to the publisher will be the same, the publisher can and should cut a lot of the other costs down or even out entirely.

    For marketing, ebooks remind us who the end customer really is: the reader. Publishers are used to seeing bookstores as their markets, and that creates problems for authors when combined with return policies. Because no matter how well a book is marketed to bookstores, they don’t succeed unless readers buy them. Since ebooks don’t have to be marketed to vendors (all ebook outlets will accept any old ebook you want to toss their way as long as it’s formatted properly), the ad budget needs to go where it should have been going all along: to introduce the book to prospective readers.

    For payment to authors, the change should be in the form of lower (or no) advances, but much, MUCH higher royalties. Lower advances arise because of the loss of front-loaded revenues for ebooks. When I say MUCH higher royalties, I’m thinking along the lines of about 50% of retail price. Publishers will find they have no choice but to offer this. After all, the author could epublish the book himself and get 70% royalties (or more). That means the publisher isn’t saying to the author, “This is what we’ll pay you to publish your book. If you don’t accept it, then your book won’t be published.” Instead, the publisher is saying to the author, “We will publish your book instead of you publishing it. We’ll provide you with several services, including editying, proofreading, a professional book cover, and marketing. Since you won’t have to do any of that stuff yourself, we will take a share of YOUR proceeds in payment for our services.” Note the change? The book and proceeds for it essentially belong to the AUTHOR, not the publisher. The publisher is providing the author a service and taking a share in payment for it.

    As for relationships with vendors, well, the big publishers have the right idea that it should be an agency model, even though they’re pricing their ebooks absurdly high. An agency model in which the vendor sells the book for the publisher and keeps a 30% commission on any sales is exactly what Amazon offers to self-published writers. There is no reason at all not to offer the exact same deal to publishers. Probably down the road, when publishers stop trying to price ebooks so as NOT to sell and so not to compete with hardcovers, and instead see them as the core of their business, the better and more successful ones (or maybe even all publishing houses) can probably demand a smaller commission paid to the vendor than a self-published author. It’s quite predictable that 20-25% will become the standard.

    We are also going to see a proliferation of smaller publishers, the serious downsizing of the Big 6 (those of them that stay in the game at all), and an increase in self-publishing. For the commenter above who deplored overpriced, poor-quality self-published books at the Kindle Store, all I can say is adapt to it. Self-publishing will allow very GOOD books to be published that would not have been publishable in the old days, but it also allows the equivalent of an entire slush pile to see daylight. It’s not hard to eliminate a bad book from consideration. Usually the paragraph of description will be as bad as the book itself. If not, all ebook vendors allow you to read a portion of the book for free. View it and do it. If it’s rough-draft crappola written by a no-talent wannabe, you’ll know it in the first paragraph or so. That’s just how it’s going to be, and it’s the price we readers pay for being the ones to decide whether a book should succeed or not, rather than some gatekeeper doing it.

  3. Publishers (at least many of them) will die. So did the buggy manufactures. That is the way the world works. As a customer that buys a ton of books I can tell you I could care less if a publisher exists or not. I just want the book and I want it cheap.

    Part of why this just doesn’t matter to me is that there are more books being published now than ever before. We are not going to loose access to books. Yes a lot of them are bad. But I can’t read half the really good ones on my shelf now.

    Publishers have to take some responsibility. They weren’t forced to give Hillary Clinton $8 million for a book that didn’t recoup its investment. That was their own decision. Bad business decisions should not be rewarded.

    What will happen, and it will be good for the consumer, is eventually DRM will die for ebooks as well. I just am not buying as much as I would if the books were DRM free. I am reading more public domain and the few publishers that are DRM free because I don’t want to spend $10 on a book that I can only read once and not give away. I give away virtually every paper book that I buy. I am not as interested in giving away the ebooks because a major reason I give paper books away is storage issues.

  4. I’ve been saying similar things inside O’Reilly as you are here Evan. There seems to be another problem here looming in the dark. Traditional publishers position in the value chain is exactly those services that you mention plus the relationships with the distributors.

    If ebooks become the dominant format for reading trade books then the need for traditional publishers is threatened. Authors can choose to publish directly or use Amazon’s or Sony’s services instead and reap a higher share of the retail price of their work.

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