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Summary:

Book publishers are trying hard to argue that e-books cost almost as much to produce as printed ones, and therefore prices for e-books should be higher — but the bottom line is that consumers don’t care what a publisher’s costs are, nor should they.

Book publishers are trying hard to defend the pricing of e-books — perhaps in part because they’ve been accused by the Justice Department of rigging prices to keep them artificially high — by arguing that it costs a lot more than most people think to produce the electronic version of a book. But as author Chuck Wendig notes, what e-books cost to manufacture or distribute is irrelevant to everyone but the publishers themselves. All that matters is what book consumers are willing to pay for an e-book — and the same principle applies for any form of digital content.

Hearing the complaints of book buyers must be frustrating for publishers, because they actually have a pretty good case for why e-books cost what they do. Although many see the price of old-fashioned things like paper and printing presses and trucks to ship them as a big cost for printed books, publishers like Penguin point out that the main costs involve advance payments to authors, marketing and other support expenses — things that also apply to e-books. As Wendig puts it:

[P]roducing e-books costs more than you think. You’re paying for editors and cover design and, of course, for the book itself, and the mechanics of putting those things into a container are not the bulk of a book’s cost. Hence, e-books are always going to be close to their physical counterparts in cost.

But as the author also notes, consumers don’t really care what a publisher’s costs are, nor are they likely to pay more simply because a publisher argues that their content is really valuable. In the same way, movie-goers don’t really care how many millions of dollars a movie studio spent on their latest blockbuster — that has no bearing on whether they want to see it or not. It is the perceived value of the e-book that matters, not the cost — and there are some good reasons why e-book consumers might want to pay less.

Financial Times columnist John Gapper pointed out in a comment on Twitter that consumers often use justifications about how expensive content is to defend their right to download it without paying. And many e-book consumers probably do under-estimate what it costs to manufacture or distribute an e-book. At the same time, however, it doesn’t take an economist to figure out that publishers are determined not to let cheaper e-book prices (driven largely by Amazon) cannibalize their print business, which is why they cut the “agency pricing” deal with Apple that landed them in antitrust-lawsuit territory.

All that matters for readers is perceived value

Wendig also makes a good point about what you get when you “buy” an e-book versus a printed book. In many ways, what you are doing is renting the content rather than actually acquiring it, since you can’t sell it when you are finished with it, and most of the time you are prevented from even lending it to someone else to read — and in extreme cases, providers like Amazon can actually delete the book from your device remotely without your permission. So e-books may be convenient in ways that printed books aren’t, but they are also less functional.

An e-book is a digital good. Ephemeral and intangible. Sometimes we don’t even have access to the e-book itself in the form of a file — in the case of Amazon, we’re just “renting” the e-book the same way you rent Taco Bell food. You bought it. It’s inside your device. But if Amazon decides you don’t need it anymore, one snap of the wizard’s fingers and the e-books are poof, gone.

Even apart from that argument, however, there’s no realistic connection between what a content producer’s costs are and what people will pay. As journalism professor Jeff Jarvis noted some time ago, in reference to newspaper paywalls and subscription plans: “No one cares what you spent. Arguing that news costs a lot is irrelevant to the market.” And as David Pakman of NYC-based VC firm Venrock has pointed out, when it comes to digital goods, the marginal cost of producing another copy is effectively zero.

In the end, all that matters is what readers want to pay — and that isn’t always going to jibe with existing business models. During a panel discussion I was on recently, the editor-in-chief of a newspaper said he asked a businessman and loyal supporter of the paper what he would be willing to pay for a subscription plan, and the number was 50-percent lower than what the paper had planned to charge. Is that fair, given how much that content costs to produce? Perhaps not. But in the end, it doesn’t matter.

As I’ve argued before — including during a recent debate with my PaidContent colleague Laura Hazard Owen about the wisdom of agency pricing — I think publishers are shooting themselves in the foot by sticking rigidly to models that were appropriate for a different world, when “windowed” releases and regional restrictions made sense. There’s at least some evidence to show that if prices drop low enough, sales can climb by orders of magnitude. Why not allow e-book prices to float and then see where they end up?

Post and thumbnail images courtesy of Flickr users Aitor Calero and Marcus Hansson

  1. Jeff Kibuule Thursday, May 3, 2012

    All it means is that once a book as “paid for itself”, a publisher can more heavily discount it to generate sales without ever really going into the red. Physical books cost money to produce, e-books do not.

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    1. That’s the point of the “marginal cost” argument, Jeff — thanks for the comment.

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  2. ghughbodell Thursday, May 3, 2012

    The basic premise of the article is that readers will in the end determine how much they are willing to pay.

    I really hope that is correct and I also hope that Legacy Publishers continue to think $8.99 to $12.99 is a good price for their product.

    That way Independents like my wife and I can offer and sell good content at $2.99 every day. I have recently tried a real bargain, offering my first three novels in a single e-book at $4.99.

    It’s working!

    Random house, et al, I think you should raise your prices!!!!

    http://www.ghughbodell.com

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  3. The upshot of all this is that it really is a free market. Publishers place e-books and printed copies on the market at some price. And consumers vote with their dollars. While everyone would like things to be cheaper, trying to legislate it because someone who doesn’t understand the industry thinks it should be cheaper, is not the way to go.
    A similar thing exists in music. It costs a lot of money to make a professional sounding record. Both in people and facilities. And while Guitar Center would like you to think that you can do professional recordings in your garage like Dave Grohl said he did at the Grammys, the reality is that he has hundreds of thousands of dollars of equipment in his garage and employed many expensive professionals to do it. Pressing physical CDs is but a fraction of those costs. Just because it appears that downloading bits doesn’t cost anything (everyone thinks servers and bandwidth are similarly free) it doesn’t mean that soft copies are going to be a fraction of physical ones.
    I’ve converted to e-books just to save on the piles of paper books that were collecting around the house, and the demise of used bookstores you used to be able to recycle them through. Along with better selection than you can find at the local brick and mortar. It’s really frustrating to read one of a series and not be able to find the others. Or it’s a trilogy and all you can find are the first and third.
    The only problem that comes up is when I read something that I think someone else in the family might enjoy and I can’t just hand them the book and say “check it out”.

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    1. That’s a fair point, Steve — but trying to arrange it so that prices will be higher (as the publishers seem to be doing with agency pricing) is also futile.

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      1. Terrence Martineau Thursday, May 3, 2012

        why?? in many ways eBooks are a superior product because of the convenience they provide.. you can view them on any number of devices.. they don’t take up physical space or weigh anything so you can carry 100 or 1000s of them with you at a time and choose which one you want to read at any given time.. likewise you don’t need a huge physical storage space in you home to store them etc.. etc..

        it’s a free market.. and like you said buyers will set the price in the end.. publisher will set a price and buyer will either think it’s fair and buy or not.. the price to produce a physical but is negligible in comparison to the price to pay authors, editors, artist for cover art, advertising, layout people etc.. etc.. all the large cost are still there for eBook and on top of those they need people to put the books into several formats for inclusion in the various stores out there.. and like I’ve said earlier eBook for many are a MORE compelling and convenient product so why should they cost just as much a the physical copy or even more..

        it DOESN’T matter what eBooks cost to make.. the going rate will be whatever value buyer place on them.. let’s let the market decide what that is.. the cost to produce eBooks is irrelevant and negligible just like it is for physical books..

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  4. The question is, as more people buy e-books, and used print books are less available, will there be more people demanding cheaper books. The story of the ebook is far from over.

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  5. This is such a contentious issue in the arts because non creative folks, who have never followed the the course of developing an artist whether it be a writer , a musician, a painter , a filmmaker or any creative entity that has been colonized by the current thought processes of technocrats, that non-creative person places zero value on the writer or artist who created the content in the first place! with the mentality of , “All music, art, books, and films, should be for free because i can down load it so easily from the internet”. I dont think people who write code and create software applications believe their creativity should be for free!!! the writer is the most important part of the e-book market and the second most important part of the market is the publisher. an e-book is no different than a transistor radio or cassette recorder. when those technologies become obsolete and if the power grid fails, people will be forced to pick up a hard back or paper back book AND READ IT. i use the term colonization because Apple did not create ipods to sell music, ipods were created to sell ipods, plain and simple and Apple devalued content in order to sell those ipods. the introduction of the ipod has been the primary reason CD sales across the globe has decreased proportionally. so, with the introduction of the electronic book devices comes the same misery and attacks on the writers and artist. squeezing out the creatives such as writers and publishers by the technology industry placing more value on those who created the technology and no value on those who created the content, which would be the books themselves. Any recording artist who has achieved success never has done so alone. there has always been a team of experienced professionals behind them, a promotion machine of individuals who drive the project to success and global visibility.the technocrats seem to place no value upon the artist who creates the content so the majority of the profit will be made by the company who created the device, the e-book device, the ipod the smart phone. my question is ; What will happen when the tech community finishes cataloguing all the previously created content that exists in the world? when that sector finishes chopping up the great literary works and music and putting it into 1′s and 0′s then loading it up on an electronic device? if the artist is exterminated by starving them out then what will folks be able to load up on to their devices? nothing new will be created. what a miserable world that would be. E-books do cost money to create in terms of marketing and promotion. the writer still needs to promote the book, adverts need to be purchased and the book needs to be promoted in order to be read. how can people convince themselves otherwise? just as musicians need to go on tour to sell CD’s or songs on itunes or spotifyed because PROMOTION COSTS MONEY and IT REQUIRES HUMANS TO CREATE THE CONTENT (SAID WRITER OR ARTIST) AND MORE HUMANS TO PUBLISH THE CONTENT AND MORE HUMANS TO CREATE THE PROMOTION CAMPAIGN!!! Lady Gaga was created by a the famous hip-hop promotion team. even in politics, to become an elected official, requires a great promotion team to get behind the candidate. SEO costs money to get traffic to a website… why is this even an issue? Because it very well may be the ‘puffing’ of the technology creators promotion machine pushing this idea through advertisements that art and writing are inconsequential to the electronic devices they are trying to sell to the public! its disgusting that so many people have allowed themselves to be convinced by such shameless ipod, e-book, smartphone promotion campaigns which depict the artists and writers as nonentities to their technology. As a daughter to a studio artist, my father was a painter who physically got up every morning and painted paintings to pay the rent and put food on the table. My father passed away in 2008. Never more will there be his artistic view point expressed in this world, what paintings and drawings he created in his life time have already been created, so what currently exists that’s it. that is why it is important for people to stop believing the technology hype of device selling and start realizing that the content which is loaded on to the device is what matters. to quote the famous rappers Public Enemy, ‘Don’t believe the hype!”

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    1. Thanks for the passionate comment — but I don’t think anyone is arguing that artistic work doesn’t have value. The problem is that in a business sense, this value is ultimately determined by the market for that work, not by the artist.

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      1. Hey folks this author is a proponent of all content being free, just remember that Matt thinks that piracy isn’t really stealing. This is borne out in the drool that he constantly harps on. When you read his articles, you need to understand that he likes the free internet, the way it once was.. Napster, Kazaa and all that stuff.

        Matt wants to live in a free, or at the most… a 99 cent internet. These articles are the closest thing to BS that Gigaom puts out.

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    2. It’s amazing how musicians were never exploited or had their work cheapened by the music business — the folks who cared about the hardware that contained the music much more than the content itself — before MP3 players were invented. Oh, what a golden age that was.

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      1. Good one, Sean :-)

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  6. Meanwhile… I’m just going to keep writing my own books and pricing them however I wish and selling them. All these arguments/fights are about control, plain and simple. The publishing industry had control for 300 years, and now they don’t, or won’t anymore as soon as everyone realizes they aren’t needed.

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    1. Gosh, now you’re the expert – I wonder how your rights sales are doing?! Do you go to all the key book fair to do business? Rights is where the money can be really made on books : )

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  7. Wait just a minute. No paper, ink, binding, cover material, warehousing cost and distribution cost….just to name the biggies. And it cost almost as much to do an e-book as paper book. BUUUULLLLLLLL SHIT. Editor….paid once. Cover designer….paid once.

    If a book sells just a few hundred e-books…EH. The truth is…that if publishers are worth their salt they can put more books out…increasing the possibility of successful editions.

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  8. I think one of the more compelling arguments against the publisher’s “model” of pricing for e-books, is the independent writer who simply sells their book on vendors such as Amazon, without any advance payment. They have to be driving the publishers crazy with this. Especially when, in some cases, these folks are making 100′s of thousands of dollars doing so. They subvert the publisher’s “logic” of how much it actually costs to make the book. There is also the flawed understanding that the advance of money to the author is somehow included in the actual production of the book. What most people understand, when associating costs to production costs, is what does it actually cost to take the book from manuscript form (which is always sent in digital form, nowadays, with some exceptions) to e-book form. In most cases, the answer is…very little. And this is why people are not as interested in paying for digital content that hasn’t even so much as gone through a format shift (from paper to digital).

    Everyone understands that there is much more that goes into initially making the book, because people understand that books don’t appear out of thin air and require a great deal of time from the author involved in creating the book. But what is being asserted by the publisher’s is THEIR cost in producing the book, once it reaches them, and getting it to market. Aside from the actual production cost, what exactly is entailed in the creation of the book? I can understand a marginal marketing cost but nothing like 10% of the cost of purchasing the book. There is so little marketing done for books and the vast majority of that is done by the vendor, the author, and the fans.

    The publishing industry is simply delusional to even consider that the cost of production between a paper book and a digital book are similar.

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  9. Thank you for this. There are SO many ebooks that I have passed on purchasing because I didn’t like the price/ don’t agree with the price fixing. I don’t download books because I don’t want to steal someone’s hard work, so I go without. I work a lot, and I have a busy life, so as nice as it would be to be able to buy books and then have time to read them, I don’t have time to read traditional media or the ability to lug it around with me. However, the Kindle app on my phone is my BFF.

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  10. Len Feldman Thursday, May 3, 2012

    Unless the cost of printing, binding, packaging, warehousing and shipping print books, along with the cost of accepting, inspecting, re-warehousing and reshipping or pulping returns is virtually zero, the cost of eBooks is not “close to their physical counterparts.” That’s why consumers believe that the price of eBooks should be lower than the price of print–they truly believe that the cost is lower, and they’re right. In short, it’s not that customers don’t care about the production cost–they do care, and they expect bits to be cheaper than atoms.

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    1. Mathew,

      You say “this value is ultimately determined by the market for that work, not by the artist.”

      This is a fundamental misunderstanding of economics. The value (or price) is set by the interaction between seller and buyer. The seller sets their price, the buyer decides what they will pay, if the two coincide then a deal can be done, if not then a deal can’t be done.

      Your statement above looks to me like a dressed-up version of the childish stuff one finds on internet discussions about pricing of books/movies/music where people argue that “I only pirate stuff because it is too expensive” or “Why should I pay $xx for something that only cost $x to produce” etc etc. The answer is, if you don’t agree with the price the seller sets, then don’t buy it.

      In the medium term I agree that ebooks are probably going to come down in price because of consumers’ price perceptions (eg sellers will only sell a lot of units when they lower their price). But it is ludicrous to suggest that either of the buyer or seller is in complete control of an economic transaction and “value”. The buyer always has the option of not buying if they think the price set is too high. That doesn’t mean the seller is obliged to cut the price in order to meet that particular buyer’s perceptions of value.

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      1. That’s true, Hugh — but if you ignore what the buyer wants to pay, then you don’t sell any of your product. That seems pretty simple to me.

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      2. But you are talking as though there is a single buyer, or a uniform mass of buyers with the same level of demand. In fact there are a lot of separate buyers with a sliding scale of demand, in other words some are prepared to pay more than others. As you lower price you sell more – that’s the basic theory of a supply and demand curve.

        So the choice facing publishers is how far to lower price in order to increase sales and profitability. This doesn’t necessarily mean lowering them to minimal levels. Your argument would suggest that for any given good or service, the best path is to sell at minimal prices, which simply isn’t true.

        What does disturb me is when I see people (not you) making the argument that since a seller/publisher is charging more than a particular individual wants to pay, that somehow justifies that individual if they choose to it without payment.

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    2. True, but commissioning, development/structural editing, copy-editing, proofreading, design, setting, digitizing and marketing costs still have to be borne by the publisher, though. And if an e-book is part of a broader publishing programme (including print) then it’s still going to have to take an overhead hit, like any other product on the books. Any discussion about e-book pricing can’t ignore these factors. Bits are cheaper than atoms, but you can’t measure these costs in terms of either. To understand how much cheaper an e-book “should be” you have to know what percentage of the bottom line the “atoms” stuff makes up for the publisher in question. If the business model means that it’s a small percentage, the impact of e-publishing on the margin won’t necessarily be that high. Many consumers aren’t aware of this.

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