Is E-Technology A Good Idea for Publishers?

With increasing popularity of e-books and e-book readers, book stores and on-line book retailers are promoting readers their e-book readers and e-books, whereas book publishers and, especially, magazine and newspaper publishers are slow to adopt this technical trend. So, why is there a big gap between the sellers and publishers? Why publishers are reluctant to adopt the e-technology concept?

This article shows you that e-book is actually a good business from the view point of economics, because it changes the landscape of book, magazine, and newspaper sales.

The following figure shows you an example of a book sale. The example assumes a fix cost of $2,000, covering all of the cost to make a book ready for publication, a variable cost of $10 per book, and a sales price of $20 per book. The example does not consider volume discount and marketing related cost, assuming marketing campaign is independent with and is needed for both media types, i.e., paper or electronic format.

ebook1If we look at sales volume from 0 to 300 books, the red line in the figure shows you the fix cost line over the sales volume, which is independent from the volume. The green line shows the total cost by adding the fix cost to the variable cost, based on the sales volume and the variable cost of $10 per book. The purple line shows the total revenue over the sales volume based on the unit price of $20 per book. Note that the green line intercepts the purple line at the sales volume of 200 books. This is the break-even point for paper book sales, where the total cost equals to the total revenue. If the sales volume is greater than 200, the publisher makes a profit; if the sales volume is less than 200, the publisher has a lost.

If the publisher sells e-books on its own web site instead of paper books, it essentially eliminates the variable cost. (If e-books are sold on a third party web site such as Amazon, the variable cost is not zero but is still a lot smaller, compared to the variable cost of paper books.) That is, the resulting e-books are just a set of computer files in common e-book formats and are ready to be distributed to e-readers and computers over computer networks or personal storage devices. If we consider only fix cost in the figure, the purple line intercepts the red line at the volume of 100 books and reduce the break-even point from 200 books to 100 books. It greatly increases the chance of making a profit for the publisher. As the sales volume increases in the figure, the profit of e-books sales is far greater than the sales of paper books.

In the following figure, the red line shows you the profit line of e-books and the green line shows you the profit line of the paper books. As a result, the blue line shows you the difference between the e-book profit and the paper book profit and it is an increasing line in linear trend.

ebook2When volume discount is considered and is assumed to increase as sales volume increases, it creates diminishing return (also profit) for larger sales volume. The volume discount will have impact to both the e-book and paper book profit lines. Although e-books will have more profit margin for discount due to their higher profit than paper books, the resulting profit difference curve would become a concave curve due to the diminishing return as a result of the discount.

Note that the example does not consider selling e-books with packaged storage devices, because it is not the way e-books are sold today, and will not be in the future; otherwise, the additional sales of storage devices with the e-books essentially incur variable cost again and brings the sales to be no better or worse than the sales of paper books.

Therefore, the sales of e-books changes the landscape of book sales by eliminating the variable cost from the sales model, reduces the break-even point, and gives publishers greater power to make more profit than selling paper books. So, it is a good idea for publishers to adopt e-technology.

Beyond the scope of this article, publishers have the following reasons not to embrace the e-technology completely today. I list them below with my comments. Overall, I do not suggest to ignore them. I agree that they need to be properly addressed to protect the intellectual property of both publishers and authors. But, they should not stop or delay the publishers to use e-technology.

  • Piracy: e-books are easy to be copied and shared for free. I think price plays a very important role in piracy. When price is too high, people cannot afford and this leads to piracy. A good example is the movie and music sales over CDs, DVDs, and Blue-Rays. Because of their high price, piracy of movie and music is high, although those studios try all kinds of methods to prevent piracy without success, such as delaying the release of new movies or hiring lawyers to pursue legal actions on distributors and consumers. For book, music, and movie lovers, they always like to keep a private copy of the item they like legitimately, when the price is right. This has been shown with the book market and recent price-reduced sales of music over iTune and Amazon. When the price is reasonable, you see increasing sales, which shows more people are spending money to buy instead of copying them.
  • Lack of affordable color display: all e-ink readers are black-and-white; only computers and computer tablets support color displays but they are expensive or not portable enough. For books and articles, I think content and comfort are more important than color display. This is why people are still buying e-readers, because they are affordable, convenient, light weight, and easy to eyes. I do agree that some newspaper and magazine articles do need the support of color display but people can still live with black-and-white display until color e-ink or other better color display technology becomes available, affordable, and comfortable.