Cracks in the Spine of the Book Business

Under pressure from technological change, cracks are starting to show within the publishing industry’s traditionally chummy ranks.

At the opening panel session of BookExpo America in New York last week, Authors Guild president Scott Turow got right to the point. “Why,” he demanded of the publishing company executives on the panel with him,  ”did publishers allow e-books to be available at the same time as paper books?”

Even with a higher royalty percentage from e-books, the bestselling author of “Presumed Innocent” and other legal thrillers noted, the 25 percent that net writers earn from e-books works out to less money than the 15 percent they earn from hardcover sales, due to a far-lower retail pricing of e-books. “What are publishers doing to justify not giving authors 50 percent?” he wanted to know.

It’s a question that’s been coming since the day Amazon shipped the first Kindle, and it will only get more urgent as e-books’ share of total book sales grows.

Turow’s comments came during a panel discussion titled The Value of  The Book, which has been a hot industry topic since Amazon began selling new-release Kindle e-books for $9.99, less than half the average price of a new hardcover. Though Amazon paid publishers the same $12-$15 wholesale price it paid them for hardcover books, publishers soon began to worry that Amazon’s loss-leader pricing (meant to spur sales of Kindle readers) will ultimately undercut the market for hardcovers by lowering consumers’ price expectations.

But the issue grew more heated and complex after Apple introduced the iBookstore, for the iPad, and agreed to adopt an “agency” pricing model. Publishers would be able to set their own retail prices for e-books on the iPad, keeping 70 percent of the proceeds for themselves while Apple took 30 percent. That allowed them to push retail prices for front-list e-books up to $12 – $15, still less than a hardcover but, from the publishers’ view, a step in the right direction.

Bolstered by this new leverage, publishers then turned on Amazon and demanded a similar pricing structure for Kindle books, setting the stage for an ongoing debate over the market value of a book.

As Turow’s comments imply, however, the question goes deeper than simply an argument over retail pricing. As the music industry did with the CD, the publishing industry has, virtually since Gutenberg’s time, pegged its business model to a single product configuration, the physical book, which in most cases provided virtually all of the revenue. As a result, the unit costs and unit prices of printed books became the starting point for all other industry calculations, from gross margins to operating budgets to marketing and promotion budgets.

More critically, the unit price of books also under-girds the industry’s most important contractual arrangements: those between authors and their publishing houses. An author’s royalties are calculated as a percentage of the retail price of books. Lowering the price of books across the board, therefore, wouldn’t just affect publishers’ gross margins, it would implicate their relationships with authors. Most publishers have increased the royalty percentage authors receive from e-book sales to compensate for the lower list price. But as Turow noted, even then writers typically see less income overall.

The music industry faced a similar dilemma as CD sales began to fade and digital sales brought in less overall  revenue. As the total pie got smaller, how it got divided became far more important and far more contentious. Labels responded by dropping artists from their roster. Artists that could afford it began dumping their labels and finding other ways to reach their fans, like social networking and releasing their own recordings on CD and in digital formats.

It’s too early to tell whether similar battles await the book industry (publishers historically have not treated authors quite as shabbily as labels have artists). But as digital technology reduces both book costs and prices, its potential to drive a wedge between authors and publishers to match the growing gap between music artists and labels will only grow.

Question of the week

Will e-books break the traditional ties among authors, agents and publishers?
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Paul Sweeting

Principal Concurrent Media Strategies

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8 Comments Subscribers to comment

  1. It seems to me they already are doing so. In any case, you make good parallels to the music industry here — are there parallels (either current or forthcoming) for the video industry as well?

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    1. Actually, the video industry provides an interesting counter-example. Unlike the book and music industries, the movie industry has long relied on multiple revenue streams and multiple price points. Selling exclusive licenses for discreet windows in discreet territories was baked into the industry’s basic business model long ago. So, while digital has certainly been a challenge for the industry, it’s impact is less concentrated.

      That said, the industry did become dangerously dependent on DVD revenue over the last decade, and insofar as digital has put downward pressure on pricing, the industry has faced something like the same sort of pressure as the music industry faced. The loss of DVD revenue has also become a source of friction between the talent and the studios, in that it has shrunk the overall pie and led studios to try to force down salaries even for A-list stars.

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