Saturday, 1 November 2003

The economics of e-books

There's a lengthy thread of comments at Ars Technica, to which I've contributed, in response to this article on Amazon.com's full-text search and page view program.

Some commentators (at Ars Technica and elsewhere) have criticized me and other authors for being overly worried about the possible negative effect of free availability of page images on sales of printed books. I think print sales of some books would probably benefit, although some including my books would suffer. But that's missing the point: the major damage from giving away e-excerpts wouldn't be the incidental effect on print sales, but the direct effect on potential revenues from e-excerpt and e-book sales.

Amazon.com has represented what it's doing as a single program, called "Search Inside the Book", and it's been defended primarily in terms of the benefits, to authors and readers alike, of full-text search. But there's no necessary connection between "search" and "page image display", and so far as I know no one -- including me -- has objected to the "search" component of the system (except on the grounds that Amazon.com didn't ask for permission from the copyright holders, which I would probably have been happy to give if asked, depending on the terms).

As Thaen points out , "Amazon just needs to start selling eBooks alongside the hard copies, perhaps for slightly less money. Search for the book, if you like it/need it, just buy the eBook for $5. It's not like this technology doesn't give them the ability to do such a thing. It would discourage even the few people who would do this, and would encourage legal sales, ala the iTunes Music Store."

Let's look at the numbers for what that might mean:

The list price of the forthcoming 3rd edition of The Practical Nomad: How to Travel Around the World is US$21.95. The largest distributors get 60% discount from list price, so if Amazon.com buys from them, my publisher gets a net wholesale price from the distributor of $8.78 a copy. I receive royalties of 15% of the net price, or $1.32 a copy. Fairly typical numbers for royalty-based trade paperbacks.

But while my publisher splits wholesale receipts for my books with me 85/15, any revenues for so-called "subsidiary rights" (including e-book and other electronic rights) are split with me 50/50 (since in those cases the publisher doesn't have the costs of printing, binding, warehousing, or shipping of printed books). Again, fairly typical. Except that, as I'm about to show, the electronic rights should probably be considered primary, and the print rights "subsidiary".

Suppose that Amazon.com's markup on e-books were the same 150% as it is on my printed books. In order for me to earn the same $1.32 a copy, my publisher would have to get $2.64, and Amazon.com would have to price the e-book version of The Practical Nomad: How to Travel Around the World at $6.60. At that price, there would probably be relatively few takers, at least until the next generation of handheld display devices. (In reality, the retail markup and the selling price could probably be less, since Amazon.com would, like the publisher, have proportionately lower fulfillment and no warehousing costs for e-books. But I'm being generous to Amazon.com, for the sake of argument.)

E-book excerpts, however, are another story. Suppose the currently critical price point for e-book excerpts is, as several people have suggested, close to the successful iTunes price for a single song of a dollar a download (as discussed in this New York Times story last week comparing business models for music downloads; free registration and cookie acceptance required). Apple's iTunes had 70% of the total paid music download market even before it was available in a Windows version, and most other services are adopting similar pricing. At that price for an excerpt from one of my books (again, with the same generous 150% retail markup by Amazon.com), my publisher would receive $0.40, of which I would get $0.20.

The bottom line for me, the author: $1.32 for each $21.95 printed book sale; $0.20 for each $1 e-excerpt sale. So if there are 6 or 7 people willing to pay $1 to download a chapter of my latest book for every one willing to pay $21.95 for a printed copy, my royalty income from sales of e-book excerpts would equal or exceed that from printed books.

Is that likely to be the case? For most book-length novels, probably not. For some nonfiction, maybe not. For short stories, novellas, and anthologies, maybe. For my books, probably. For guidebooks, almost certainly.

My FAQ on international airfares and discounts , for example, gets tens of thousands of page views a month on multiple mirror sites. How many of those readers would be willing to pay $1 for the 100+ page chapter on airfares in the new edition of the book? Quite a lot, I suspect; I've even had discussions with my publisher about bringing it out in printed form as a separate book. The resource guide, another 100+ page chapter, would also seem likely to have a substantial potential market as a $1 download.

For a typical destination guidebook, it would seem almost beyond argument that the number of people willing to pay $1 to download the chapter or section relevant to their trip would be a multiple larger than 6 or 7 of the number willing to pay the price of the entire printed book.

I think the numbers I've sketched out here are fairly realistic. It doesn't actually matter, though, whether royalties for e-excerpts would exceed those for printed books. Only a tiny fraction of travellers to most destinations buy any guidebook. Most of the people who would pay $1 for an electronic guidebook excerpt wouldn't otherwise have bought a guidebook at all. So e-excerpt sales would be almost purely incremental revenue from a different group of customers, not diverted from would-have-been print book buyers.

Many travellers are going to only one or a few places, and want neither the expense nor the weight of an entire printed guidebook. Some buy the whole book anyway, and tear out just the section(s) they want. But many don't, feeling that it isn't worth paying for the parts of the book that aren't relevant to their trip, or that it's too hard to keep loose pages in order once they've broken the binding. Anyone who's spent time in travel bookstores or helping people plan their trips knows that there is enormous pent-up demand for customized or semi-customized guidebook excerpts.

Perhaps the clearest proof of the market potential for guidebook excerpts is the large number of successful volumes that were originally sections of guidebooks to larger regions. In the Moon Handbooks series from my publisher, for example, David Stanley's definitive Moon Handbooks South Pacific has expanded into an entire series of guidebooks to smaller sections of the region. Bill Dalton's Moon Handbooks Bali almost certainly outsells his Moon Handbooks Indonesia , of which it was originally a chapter, but I suspect only a small fraction of the buyers of the Bali handbook would otherwise have bought the complete Indonesia guide.

Given current technology, e-books are less valuable to most people than printed books. But since they can be sold much more cheaply, yet with the same profit to the author and publisher, that's much less important than you might think.

Just for kicks, I tried putting some page images saved from Amazon.com on my Diamond Mako (Psion Revo Plus) PDA. They were only barely legible (although I could have used them that way, in a pinch, for addresses, phone numbers, and the like). That's not a fair test, though, since Amazon.com has deliberately degraded the images, slightly, in an attempt to make them legible only on full-sized displays.

A better guide to the utility of e-guidebooks was my experience earlier this year travelling for the first time with a guidebook in electronic form: I "test drove" Wayne Bernhardson's excellent new Moon Handbooks Buenos Aires with a set of PDF files of the page proofs, downloaded with the permisison of both the author and our mutual publisher. On my PDA, they were quite sufficent for details like addresses, with the advantage that searching electronic text is often quicker than using the index of a printed book, and that my PDA is smaller and lighter than almost any guidebook. I read some longer sections on my small laptop-sized Psion netBook , and printed out some sections (on a high-speed office laser printer) to bring with me in a flexible three-ring binder. The binder was bigger than a guidebook, but most of the time we were staying in one place. And I found I actually preferred pulling just the relevant pages out of the binder to take with me for the day -- and being able to put them back in sequence later, which you can't do if you tear pages out of a bound book -- rather than having to decide whether to carry an entire printed book each day. For the price, after that experience, I'd buy a lot more $5 e-guidebooks than $20 printed ones, for certain types of trips (e.g. not to the Third or Fourth World) -- if Amazon.com or another distributor gave me that choice.

The point is not primarily that Amazon.com's unauthorized and copyright infringing giveaway of e-book excerpts is undermining print books sales (although I think it likely that for many books it is). The point is that Amazon's theft and giveaway of e-excerpts is depriving authors and publishers of all possible revenue from electronic rights that for many books are already, properly marketed, substantially more valuable than the print rights. And the share of potential royalties represented by electronic rights is only likely to increase as display technology improves. Amazon.com is stealing most of the value of my, and my publishers's, intellectual property in my books.

Another commenter at Ars Technica, Hux, dismisses my and other authors' objections to Amazon.com giving away our works in electronic form as "the idiocy of copyright holders trying to cling to outdated sales models". But it's precisely because I see new sales models like e-book downloads as valuable -- already potentially more valuable than printed books, and increasingly so in the future -- that I object to someone else giving mine away for free without my permission.

Based on what's already been developed and deployed, Amazon.com's page-display system could easily and fairly quickly be modified into an e-excerpt sales system generating, almost immediately, revenues for authors and publishers of many types of books exceeding anything they are ever likely to get from sales of print books through Amazon.com or any other channel. My goal isn't to shut down new e-distribution channels, but to realize their potential.

Copy protection is an issue, but it's a surmountable one: I've bought specialized business publications costing hunbdreds of dollars that were delivered as unencrypted PDF files. For most potential e-excerpt buyers, theft won't be worth the nuisance if the price point is low enough (e.g. $1).

Amazon.com has a large financial incentive to negotiate a better, author-approved and mutually beneficial e-distribution scheme. In the USA, statutory damages for copyright infringement under 17 U.S.C. 504c start at a minimum of $750 per infringement (up to $150,000), even in the absence of any actual damages. Statutory damages can be reduced to as little as $200 if "infringer was not aware and had no reason to believe that his or her acts constituted an infringement of copyright". But the copyright notices in the page images made available by Amazon.com, showing copyright in the names of authors, would seem to preclude any such claim of "innocent infringement".

Supposing that half of the 120,000 books in the Amazon.com page-view program are copyrighted by their authors (almost all the ones I looked at were), Amazon.com faces minimum liability of $45 million even if they desisted yesterday. Hopefully, that will provide sufficient incentive for them to desist from their ongoing copyright infringement, contact writers, apologize, and initiate negotiations toward a settlement that will provide fair compensation to authors and other rights holders for the infringement to date and, more importantly, for future e-distribution by Amazon.com of copyrighted works.

[Addendum: From this story today in Publishers Weekly , it sounds like Google is planning something much more like what I'm suggesting than like what Amazon.com has done: "it is unlikely that the content will be provided in excerpted passages to customers, as it is on Amazon.... If a user clicks through, he or she would be sent to a separate page that contains a book abstract and the opportunity to buy the title." That's getting closer, but still missing the opportunity for instant purchase of an excerpt in electronic form. PW quotes an unnamed publisher as saying Google claimed "it has reached agreements that allow it to enter as many as 60,000 titles in its database." Let's hope that Google recognizes the need to get approval from authors first, whatever it's planning to do.]

[Further addendum, 7 November 2003: In digging further, I came across this analysis of Electronic Rights: Publishing Agreement - Grant of Rights & Royalty Clauses, which is from a publishers' attorney but nonetheless supports the idea that under standard book publisheing contracts, authors are entitled to compensation for e-book and other electronic rights at the (almost always higher) percentage for "subsidiary rights", rather than the (typically much lower) royalty percentage for "primary rights" in the book itself. That's the assumption underlying my analysis above, and I wouldn't have thought that it even required argument. The author, Lloyd L. Rich, also calls attention in another article in the same series on Electronic Rights: What is a Book? to the opinion of the U.S. Court of Appeals for the 2nd Circuit, relying on New York state contract law, in Random House v. RosettaBooks , which is even more directly applicable than Tasini v. New York Times to the question of whether publishers or authors own e-book rights.]

Link | Posted by Edward on Saturday, 1 November 2003, 17:03 ( 5:03 PM) | TrackBack (1)
Comments

Ed's comments on marketing electronic segments of guidebooks for a low price are right on. I'm just waiting for it to happen!

Posted by: David Stanley, 3 November 2003, 09:29 ( 9:29 AM)
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