There is a common belief that since the cost of reproducing an e-book is virtually nil and certainly less than printing one, that e-books should cost less to the consumer. The answer is maybe. It all hinges on several variables including the fixed a variable costs along with the revenue model used.
The Profit Model
Let’s define a few parameters first.
- F — the fixed cost of developing the book, i.e. copy 1
- V — the variable cost of producing and distributing a book
- P — the price of the book
- U — the units sold
The revenue, cost, and resulting profit to the publisher is given by:
- Revenue = P x U
- Cost = F + V x U
- Profit = Revenue – Cost= (P – V) x U – F
In deciding to publish or not, various estimates are made as to the expected values of the variables involved. On the cost side F and V can often be gauged by prior publications, and P is under the control of the publisher and market realities. Eventually one arrives at a set of estimates that yield a profit to earn the cost of investment F.
Trade Book vs. Text Book
Here’s where the story diverges. Trade books have very low values of F compared to textbooks that have increasingly higher fixed costs of development. While advances in printing technology have resulted in moderate variable costs, trade and text do have structurally differing values. E-Books have virtually no variable costs associated with them.
Risk and Reward
Now the remaining question revolves around the risk involved. If we define risk as the variance of profit, then we have:
- Risk = VAR[Profit]= (P – V) x VAR[U], assuming P and V are known
As V goes down, Risk goes up. Also, as F goes up, the need for profit goes up to cover the cost of capital (and Risk).
Trade books can survive these economic considerations and still be competitive, but the textbook with very high fixed development costs cannot, at least under the current revenue model.
With revenue totally dependent on volume there is no wiggle room. If, on the other hand, revenue was guaranteed, fixed at a level independent of units, the the low variable cost, high fixed cost model will work.
We will see electronic materials (textbook replacements) in the Elhi market before the Higher Ed market. District and state wide adoptions guarantee revenue up front, whereas the individual professor adoption, single student purchase model leaves too much risk on the table at this time. The result will most likely be increases in the price of text books for both printed and electronic, but driven primarily by the need to cover the increased risk associated with higher fixed and lower variable costs.
The trade book, however, has little to no fixed cost. Lowering the variable cost can allow electronic versions to be priced lower. We should see these popular books decrease in price over time due to competitive pressures.
Conclusion
Not all books are created equal. Textbooks used in education and other materials requiring greater fixed investment to bring to market will most likely require higher prices. Trade books on the other hand where there are low fixed costs will decrease in price in their electronic versions.
I fail to understand why e-books aren’t cheaper than the paperback books. It would seem that initial costs can be combined as part of the cost of getting the book to market. The split comes with paper or no paper. I believe the publishing industry has been digitizing books (as evidenced by the encyclopedias on a CD) for a number of years now.
Without getting into the finite details, savings should come with the printing, shipping, storage, and marketing (I’ll skip the disposal costs, enviromental concerns, etc.)
Even a book on a CD is less costly (a CD with data may run $1.25 with profit,).
Currently, I see paperback books less costly than digitized books.
$9.99 for an e-book is nuts! Sounds like an accounting/manufacturing/marketing allocation problem to me! Check your figures.
There’s a big difference between text and trade. In trade books the fixed costs are low and electronic distribution makes good economic sense. When it comes to big, multi-color, interactive eTextbooks the case for a different distribution model can be made.
Having spent many years in the educational materials industry (Follett Corporation, retired), I have followed the eBook for quite some time. The technology constraints of screen resolution and copy protection seem to have been solved, but I do take an issue with the economics, especially for textbooks and the way they are marketed in higher education.
When I was an undergraduate my books were much smaller, black and white, few graphs, and usually sold without any study guides or other ancillary materials. The authors received a percentage of the sales. There has been a long standing trend as education publishers have consolidated to make the book bigger, more colorful, and with many ancillaries both for the student as well as the faculty. I currently teach at the City Colleges of Chicago so I’ve seen the trends from both the distribution and sales side as well as the consumer side.
To make a long story short, while books may be books, textbooks are of a far different color than trade books. The difference is primarily in the high fixed costs to produce the first copy of the textbook as opposed to the trade book where the author bears much of the risk. The variable cost of the book are fairly well known. Printing technology has improved greatly, but those bulky texts do add up.
The revenue model for higher education textbooks has remained the same: price times units sold.
While this works great in the trade section of the market where fixed costs are relatively low, there is a problem for books that have increasingly higher fixed costs. And now we have the prospect of declining variable costs for the eBook.
If you do the math and look at profit as revenue less fixed and variable costs and where units sold is a random variable, you come to the conclusion that the variability of profit increases when fixed cost goes up and variable costs go down. This is precisely what eTextbooks are going to do.
If you equate variability with risk, then eTextbooks in higher education will probably not cost less, but should in fact cost more to offset the increased investment up front in producing the first copy. Now visualize that the costs are a lot more, such as taking the electronic media to the next level by adding features that are unavailable in print, and the situation becomes even more exacerbated. As an aside, I often used to remark that the worst thing about the word “eBook” was the word “book.” It really is a different media.
There is a solution to the higher education eTextbook dilemma, and it is found in the Elhi (elementary and high school) market where materials are essentially site licensed. This type of pricing and distribution flattens the revenue line to more closely match the cost line and therefore lowers the risk to the publisher. I’ve been in the used book and textbook rental side and know full well that publishers try to maximize their sell through and minimize losses of rental and used book operations.
I had almost 10% of my students come up to me and ask if they could use the electronic version of the text chosen for my most recent class in statistics, and it’s just a plain electronic translation of the printed text. The eTextbook is here, and I know it will be successful, but look for a real push to change the sales as distribution model to more closely match the high fixed cost, low variable cost that is driving the higher education publishers today.