50 Shades of Green: Consumer Confusion over E-Book Pricing

MacKenzie Hamon
Technology 802
January 18, 2013

“Where publishing is concerned, the Internet is both midwife and executioner. It has never been easier to reach large numbers of readers, but these readers have never felt more entitled to be informed and entertained for free.”
– Sam Harris, The Future of the Book

The e-book: ever since it’s beginning it has posed both ­­­equal opportunity and threat to publishers. E-books allow for the ability to explore new content, format, and design, and provide the chance to reach an audience that not only likes to read, but likes the convenience of being able to carry their library around with them; an audience that enjoys the instant satisfaction of not having to leave their house to purchase the books they want to read. However, e-books also pose a threat to the publishing industry, as many consumers of e-books are Internet-savvy, and have certain expectations when it comes to pricing. The digitization of music is a good example of this. Many people felt that they did not have to spend money on a CD when they could pirate the music online for free. This led to Apple’s iTunes store selling both full albums and individual tracks for considerably less money than before.

Like consumers of music, consumers of e-books believe these works should be like anything else found online: free and readily accessible. A large part of consumer confusion over e-book pricing stems from a miscommunication between publishers and readers. Consumers do not understand the work that goes into an e-book on the publisher’s end because publishers have not provided them with that information. As e-book prices continue to fluctuate, the consumer is left confused over who is raising the price, whose side publishers are on, and why prices change so much.

A pricing model for e-books has not yet been established, since there is no price that seems to works for all parties involved: as it stands, publishers feel they are not making enough money to cover the cost of producing an e-book, and consumers feel the price is still too high. While the current pricing models allow for more competition in the e-book marketplace, which is a good thing, the current trend of e-book pricing is not feasible or functional for both publishers and consumers, and coming to a tolerable balance between two extremes may be the only solution.

The confusion over e-book pricing is not simply a tug-of-war between readers and publishers, but a war between publishers and retailers. In 2011, Apple and five of the six big publishers—Hachette, Macmillan, Simon & Schuster, Penguin and HarperCollins—were sued by the Department of Justice for colluding to raise e-book prices. This was one of the first times the war over e-book pricing was made public (Bransford). The lawsuit further fueled consumer confusion over the pricing of e-books, and painted the publisher as the “bad business” trying to raise prices to presumably make a larger profit.

The lawsuit stemmed from 2010, when Apple was set to launch the iPad and the iBookstore. The iBookstore worked for the iPad as other e-reading devices worked: consumers could use the iBookstore’s huge database to purchase and download e-books directly to their iPad (Bransford). But Apple wanted competition in the marketplace, so that their new device would be able to compete with Amazon’s huge database of books. When it came to e-books, Amazon had prices that were so low that no one else could compete with them. At the time, they had just released the Kindle, and were using lower prices on books to fuel demand for the device and give it a larger share in the e-book market early on (Bransford). By pricing e-books so low, Amazon not only devalued the book, but trained consumers to expect a lower price than was possible.

No one could compete with Amazon, and publishers wanted competition so that they could sell their book to a wider audience. Apple also wanted competition so that the iPad would have a chance. They knew they would not be able to take over and become the only retailer on the market because Amazon already had a loyal customer following, so they instead decided to fuel the demand for their device through other means. Because of this desire for competition, Apple created the “agency” model of publishing, and offered it to the big six publishers. This model could have worked had the publishers only made a deal with Apple, as there are no laws barring publishers from making a deal with one retailer to set their books at whatever price they choose (Owen). But the agency model dictated that only publishers could set the price of their e-books, and this price had to be the same across every retailer, in order to encourage competition (Owen).

Prior to the launch of the iPad and the agency model, publishers used the “wholesale” model of publishing. This model is still the most common one used today, especially for print book sales. The wholesale model dictates that the publishers set a list price for the retailer, and then sell it to the retailer at a 50% discount. The retailer can then re-sell the book for whatever they want (Bransford). In the agency model, publishers take a larger portion of the list price, 70%, while the retailer takes 30%; however, the publisher makes less money per unit, even though they are getting a bigger cut (Bransford).

Here’s an example taken from Nathan Bransford’s article, Why E-Books Cost so Much (the numbers have been changed): say a publisher was selling an e-book, and listed it for $22.99. In the wholesale model, Amazon could take that list price and slash it, charging the consumer $7.99 for the e-book. This means the publisher would take roughly half of the list price, $11.50, and Amazon would take a loss of $3.50 on the book. In the agency model, the publisher sets the price of their e-book at $14.99, receiving only $10.50 per unit (70% of $14.99), while Amazon would make $4.50 per unit.

Publishers who went along with the agency pricing model were okay with making less money because Amazon could no longer undercut them by lowering the price of their e-book. That meant that retailers like Apple could come in and drive competition, and the publisher didn’t have to worry about their book being sold for less money. They were the ones who could choose what they wanted to price their e-book at, and they were only ones who could change this price. Publishers were also okay with the agency pricing model slowing down consumer consumption because they did not want to see the print side of their operations die out. The rapid closing of bookstores that has been occurring over the past ten years is not only bad for the publisher, who struggles to have their books reach a wide audience as a result, but is also bad for e-books (Streitfeld). Consumers may have stopped purchasing books at bookstores, but they may still use them to scout out the new releases they want to buy, and download the books to their e-readers, instead of tediously scrolling through innumerable lists online.

Using the agency model didn’t mean publishers were making more money, but, it did allow them to fuel competition in the marketplace, and negotiate their own prices with Amazon and other sellers. Now, retailers such as Apple, Chapters/Indigo, and Barnes & Noble can compete with Amazon. Retailers no longer have to be able to sell the cheapest books, because consumers now base their purchasing decisions on user experience (Bransford). Many people already have their preferred e-reading device, which they have chosen to buy from any of the above retailers based on selection, price, and accessibility. Book publishers who switched to Apple’s agency model got exactly what they wanted: competition, and the opportunity to put pressure on Amazon.

While the majority of those involved in the Department of Justice lawsuit have settled, e-book prices are still an issue for consumers. Since the agency model, many e-books are now listed between $10 and $15 (Streitfeld). Although this is still generally cheaper than print versions of books, it looks expensive compared to the Kindle Singles priced at $0.99, or those for sale for less than $10, which are largely written by self-published authors, such as E.L James, who does not have the overhead costs of a publisher (Crow).

Though the price of e-books has gone up, it is still not set at a price that both publishers and consumers can agree on. Publishers are not making enough money to cover costs, and consumers look at an e-book priced between $10-$15 and see it as being too expensive. A large part of consumer confusion stems from the perception of value that is linked to something electronic (Harkaway). While the e-book is still a book, it cannot be physically held or shared, and is stored on a device, which makes it seem less substantial than a print book.

In his article, Consumers Upset and Confused Over E-Book Pricing, Jeremy Greenfield asks consumers about their concerns regarding e-book pricing, and concludes that there is, evidently, a lack of communication between publishers and their readers. Many consumers believe that publishers make more money on e-books because to the best of their knowledge, e-books cost next to nothing to distribute, create, and sell. Diane Castle, a 36-year-old writer from Dallas that Greenfield interviews, embodies this belief: “‘Why the frick-frack do these major publishers think it’s okay to put out a paperback at half the price of an e-book they can upload and forget?’” (Greenfield). This is the attitude many consumers take over e-books. They either do not understand the costs associated with how e-books are made and distributed, or they have formed their opinion on e-book pricing based on Amazon’s low prices. With the 2011 lawsuit filed by the Department of Justice, even more consumers believed that the high price of e-books is simply the result of a group of publishers who are greedy and want more money.

What consumers do not understand is that e-books still require the same amount of money to make, if not more. While publishers no longer have the added cost of printing, they must pay for author advances and royalties—still the largest cost associated with producing a book—editing, proofreading, design, illustrations, sales, marketing, staff—which may include either the cost of extra staff or the cost of outsourcing in order to convert a print book into an e-book—and distribution, which still occurs for e-books (Greenfield). Distributors of e-books, according to Greenfield, can take anywhere from 2-9% of profits.

Since the cost of producing an e-book runs almost equal to the cost of producing a print book, with less return on the publishers end for the effort, profits are becoming shakier (Crow, Part 2). Publishers are becoming stricter on who they decide to publish. Authors who have a track record of success are more likely to be published over new authors. This means that the books that are being published are becoming homogenized. Consumers who enjoy reading books that are not on the bestseller list are buying and consuming less, which also affects the profitability of the publishing house.

In the aftermath of the 2011 Department of Justice lawsuit, the price of e-books was supposed to drop significantly, as Amazon was once again allowed to set the price of e-books however they chose (Streitfeld). While the price of e-books has lowered overall, the large drop in prices that was expected did not happen, and the $10 floor for e-books is largely still intact. Not only that, but e-book sales are not growing as fast as they have been in previous years. In Little Sign of a Predicted E-Book Price War, David Streitfeld looks at the numbers behind e-book growth and market share. He claims that adult e-book sales were up 34% from 2011, which seems significant, until you consider that sales had been doubling prior to that every year for the past few years.

Streitfeld also draws on information gathered by Simba, a company that regularly surveys e-book buyers. The company claims that at any given time, 1/3 of e-book users have not bought a new title in over twelve months because they want to finish the books they have already bought (Streitfeld).

E-book devices are also getting cheaper. People who don’t have one at this point can purchase a device for less than one hundred dollars at any retailer. Considering the first Kindles were sold for $399 when they were released in 2007, this is a significant drop in price.

Both the agency and wholesale pricing models do not work for e-books. Publishers who are not able to lower their prices run the risk of going out of business, and consumers who do not agree with the price of e-books will try to get the digital versions of books through other means, including pirate the document (Crow, Part 2). There needs to be communication between publishers and readers. Consumers can see that the list price publishers want their book to be sold at is being slashed by online retailers such as Amazon, but they do not understand what this means for the publishing house because there is no transparency on the publishers part in their interaction with their readers (see Joanne Penn’s Why it’s Time for More Transparency in Publishing). Random House has begun this conversation with their readers through a video they created, which shows what goes on inside their publishing house, and all of the work that goes into publishing a manuscript.

While consumers may complain about the cost of an e-book, in the end, they are still purchasing e-books, and their device counterparts, at an unprecedented rate. As the cost for devices goes down, and competition increases between retailers in both Canada and the United States, e-book prices will stay the same, if not increase. Retailers will not lower their prices if it will not help them increase their market share. Perhaps the answer to the confusion over e-book pricing is to create a separation in the minds of both the consumer and the publisher that the e-book and the print book are two different entities, which can be thought of in different ways. Consumer’s confusion over e-book pricing will only be clarified when communication occurs between publishers, retailers, and readers alike.

 

Works Cited

 

Bransford, Nathan. “Why E-Books Cost so Much.” CNET. CNET News, 11 April 2012. Web. 6 January 2013.

Crow, Lorien. “Are E-Books Fairly Priced? — Part 1.” Mobiledia. Mobiledia Corp., 28 February 2012. Web. 7 January 2013.

Crow, Lorien. “Are E-Books Fairly Priced? — Part 2.” Mobiledia. Mobiledia Corp., 29 February 2012. Web. 7 January 2013.

Greenfield, Jeremy. “Consumers Upset and Confused Over E-Book Pricing.” Digital Book World. FW Media, 18 April 2012. Web. 6 January 2013.

Harkaway, Nick. “Price War Could Kill Industry (And Indeed So Could Industry).” Futurebook. The Bookseller, 19 September 2012. Web. 16 January 2013.

Harris, Sam. “The Future of the Book.” Sam Harris’ Blog. Sam Harris, 26 September 2011. Web. 7 January 2013.

Owen, Laura Hazard. “Everything You Need to Know About the E-Book Lawsuit in One Post.” paidContent. Gigaom, 11 April 2012. Web. 7 January 2013.

Penn, Joanne. “Why it’s Time for More Transparency in Publishing.” Futurebook. The Bookseller, 23 November 2012. Web. 16 January 2013.

Streitfeld, David. “Little Sign of a Predicted E-Book Price War.” The New York Times. The New York Times, 23 December 2012. Web. 10 January 2013.

2 comments:

  1. Great paper, MacKenzie! I absolutely agree that there is a disconnect between the publisher’s understanding of the cost of ebooks and the consumer’s expectation of affordable and easy access. This expectation is made worse by strict DRM that cuts off the reader’s ability to share ebooks or even transfer them between devices.

    I definitely think that the key is educating the public, and unfortunately perceptions of value were totally skewed by Amazon’s pricing (and the mass of free content available online). Before starting MPub, I too thought that publishers simply got additional revenue from ebooks, for a fairly low production cost. I didn’t understand that ebook sales could cannibalize print sales, making for less revenue overall. I stand somewhere in the middle now, wanting low costs as a consumer but understanding the industry’s dire need to fix the pricing issue.

    However, I do think that it’s a bit misleading to say that the cost of producing ebooks includes royalties, editing, proofreading, design, illustrations, sales, marketing, staff, etc. Most publishers are still producing print first, and adding on ebooks where they can. So those costs are shared with print production. In a P&L, only a percentage of those costs should appear under ebooks. The additional ebook-only costs would be conversion (if outsourced), staff hours and distribution.

    Since ebook sales are still growing, if not as rapidly, I think it’s critical that publishers get the expertise in house to create their own ebooks. It’s not as difficult to learn as it may seem, and would help the publisher save on conversion costs and the added staff hours for proofing. Also, the O’Reilly reader survey shows that a large portion (11%) of respondents say they buy their ebooks directly from the publisher. In a perfect future, more publishers would invest in building their brand, in having e-commerce on their websites and in ebook discoverability. Then they could help educate the buyers regarding the true price of ebooks and cut out the distribution costs.

    One last thought – I was interested to learn that the self-publishing site LeanPub allows authors to list a suggested price and a minimum price for their ebooks. There is even a slider that shows how much the author will earn for the amount the consumer is willing to pay. In LeanPub’s Mini TOC presentation, they mentioned that people started to pay more for ebooks when they added the slider feature. Something to consider, as part of an educational campaign for consumers?

  2. Great recap of the issues MacKenzie, in addition to the reader-friendly version of the Google settlement.

    I agree with Lee regarding the point about the cost of ebook production and whether that is comparable to the warehousing and distribution costs associated with print. There are still costs associated with distribution and DRM for ebooks but digital files are certainly a different set of circumstances.

    Part of the strategy for publishers can be to educate readers, or as Lee points out, to present the value and payment to the author as an incentive for higher prices. Part of the battle isn’t so much with reader perception or even the battle between publishers and vendors, which you point out, but rather between publishers and authors/agents who want certain contract stipulations that make the margins even smaller for publishers who are taking on the risk in terms of costs of publishing the work in the first place. This is what leads to the smaller, more selective list too.

    One point, Apple didn’t create the agency model, this has been in use before but the adoption of it for ebooks vs print is where feathers were ruffled.

    This article is another good look at the issue.
    http://publishingtrendsetter.com/industryinsight/simple-explanation-agency-model/

    Thanks for breaking this down so clearly.

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