7 Reasons eBooks Should Be Almost Free

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If you want to understand why I think eBooks should be almost free, let me start by telling you a little story (first related by Peter Drucker in his classic Innovation and Entrepreneurship on pp. 33 ff.):

Some decades ago, the chairman of Macy’s became disturbed by a trend he saw in his industry. Most customers had come into his store to buy clothes, but more and more, people were buying appliances instead. He didn’t know how to stop the rampant sale of appliances.

“Why do you want to stop them?” Peter Drucker asked. “Are you losing money on them?”

No. In fact, appliances had a bigger profit margin than clothing did. Furthermore, shoplifters rarely stole appliances, like they stole clothes. And appliance buyers rarely returned their purchases, like clothes shoppers did. Appliances were a money maker.

Yet he still wanted to stop selling them.

“Then, do the appliance customers keep the fashion customers away?”

Absolutely not. In fact, quite the reverse. People who came into the store to buy appliances often bought clothing as well, since they were there shopping anyway.

“But,” explained the chairman, “in this kind of store, it is normal and healthy for fashion to produce 70% of sales. Appliance sales have grown so fast that they now account for 60%, leaving only 40% for fashion. We’ve tried everything we know to make fashion sales grow as fast as appliances, but nothing works. So the only thing left is to push down appliance sales in order to restore the proper balance.”

Meanwhile, Bloomingdale’s, who was then a relatively small player in the industry, capitalized on the shift in the market. Building a new strategy around their housewares department, they used the opportunity to brand themselves as the “smart New York store,” and they grew to unseat other stores, such as Best, that were leaders in the 1950’s and have now disappeared.

Peter Drucker sums up his telling of the story thusly:

The Macy’s story will be called extreme. But the only uncommon aspect about it is that the chairman was aware of what he was doing. Though not conscious of their folly, far too many managements act the way Macy’s did.

Appliances and eBooks

Last week, Bloomberg reported that Amazon’s share of the eBook industry will likely decrease, because of competition from Apple’s iPad and others, citing a group of industry analysts.

“At the same time,” the article continues, “Amazon.com, seller of the Kindle e-book reading device, may boost digital book sales by 83 percent this year to $248 million from $135 million last year, the analysts said in a note today. By 2015, those sales should reach $775 million for a market share of 35 percent, they said.”

So, let me get this straight: Amazon’s eBook market share is shrinking, but their total eBook sales could grow by 83% this year?! All because the eBook market is exploding.

This is bound to disturb traditional publishers, who are used to selling paper books… And it does.

Last month, Amazon and Macmillian fought over eBook pricing. Macmillan wanted to raise the price to $15, instead of selling them for $9.99.

This is not about Macmillan. Rather, it’s about book publishers being faced with a market shift and not being able to cope.

Says News Corp Chairman and CEO Rupert Murdoch of Amazon’s practice of discounting eBooks to get them down to $9.99, “it really devalues books and it hurts all the retailers of the hard cover books.” (News Corp owns HarperCollins.)

He goes on to say, “There will be prices very much less than the printed copies of books but still will not be fixed in a way that Amazon has been doing it.”

It’s frequently not so blatant when a businessman is talking out of his ass, but $15 is not “very much less” than a printed book. $9.99 is not even “very much less” than a printed book. So unless I’ve completely misunderstood him, he’s full of B.S.

Or check out Twenties Girl by Sophie Kinsella—very much worth reading, from what I can tell. But not on the Kindle, as we’ll soon see. This book is published by The Dial Press, which is part of Random House. Right now, the hardcover is $17.16 at Amazon ($26 list price). The soon-to-be-available paperback Amazon sells for $10.12 ($15 list). The Kindle version is $14.30 ($26 list).

There’s only one conclusion I can draw, that the big publishers want to push back runaway sales of eBooks.

7 Reasons for Cheap eBooks

I should not need to point out how incredibly stupid this is, but I will, just for kicks:

  1. eBooks have zero production cost, that is, printing cost, manufacturing cost, per-unit cost. Bits are just bits. All of the cost of the eBook is in development (e.g., paying the author) and sales and marketing (e.g., advertising and distribution). Because there’s no paper involved, no cardboard, no ink, no glue. Nothing even to hold in your hand. Customers know this, and they discount their perceived value of the eBook appropriately, especially for novels and memoirs.

  2. Even with their discounted value, eBooks can make more money than paper books. That’s because—I’ll say it again—eBooks cost nothing to produce. Also eBook returns are less costly to process, if you accept returns on eBooks at all. (I do, but some companies don’t, interestingly enough.) Therefore, smart publishers are going to compete with each other for eBook sales, and those who don’t will be left in the dust.

  3. Customers swap, share, give away, and resell paper books. Not so with eBooks. Partially, this is because eBooks have no established first sale doctrine. Once the publisher sells a paper book, it doesn’t belong to him anymore. Yes, he can claim copyright in the content of the book, but he has no rights in the physical book itself. This key legal principle has allowed libraries, book-swaps, and used-book sellers to flourish over the past 100 years. But with an eBook, the picture is less clear. When you buy an eBook, you’re not really buying the book; rather, you’re downloading its contents to your Kindle, and Amazon does not allow you to share or trade Kindle eBooks. This makes the eBooks more valuable to publishers and less valuable to readers.

  4. The more you tell, the more you sell. Evidence indicates that wide distribution of eBooks increases sale of paper books, because of the social-proof principle. (I know that various industries have denied this is true, but for the most part, they’re making it up.) If more people are reading Twilight, for example, all telling their friends about it and even buying copies for their friends, it doesn’t matter so much how good (or not) it actually is. The same thing happened, for example, when Seth Godin gave away 500,000 electronic copies of Unleashing the Ideavirus, propelling the paper version onto the Amazon best-seller list. That makes low-cost eBooks a form of advertising for publishers.

  5. Because of the economy, more people are buying for the short-term, rather than for the long-term. In a recession or depression, people tend to buy things they will use (like food), not things they plan to keep (like books). Or if they buy books, they’ll buy them to read—Remember that? Actually reading books that you buy?—rather than to shelf them. And then they’ll be more likely, after they finish reading them, to resell or trade them for new books. This can decrease the value of eBooks even further, compared to paper books.

  6. You can’t autograph an eBook. The fact is that cheap eBooks increase the value of paper books, especially limited editions or autographed copies, because it makes them more exclusive. This is called the contrast principle, that your mind naturally tends to exaggerate the differences it perceives between two different things. If you immerse your hand in ice water and then turn around and stick it in cool water, the cool water will feel hot. Next to a real book, an eBook seems even less substantial than it is, and next to an eBook, an autographed copy seems more. And that says nothing about what it does to the value of gifts, special editions, merchandise, and product bundles. (Star Trek fans may have noticed this in the way characters in that show look at books.)

  7. And then there’s my favorite: You can’t soak in a hot bath with a Kindle. But you can with a mass-market paperback. For me personally, that means a lot.

Low eBook Prices

That’s why I’ve been releasing inexpensive electronic editions of my books, even giving them away for free in certain circumstances. You can get From the Ashes of Courage on the Kindle for 99¢. Ditto Love through the Eyes of an Idiot. You can get <$1 versions for MobiPocket Reader, Adobe Digital Editions, and in PDF. All DRM-free. Now, 99¢ could be too cheap, but it’s a common price. How much would you pay to read a book? Not to have a book, just to read it, with the option of rereading it as many times as you want. That’s essentially what you’re getting with an eBook.

You can also preview all my books in their entirety on Google Books. Reading my books online: Isn’t that stealing? This is something a friend asked me once. And I was actually shocked at the question. No! I’ve made these books available to be read. It’s my own, personal, digital library. Feel free to borrow that copy; just return it when you’re done. Why do I believe this is fair? Aside from all the reasons I listed above:

I believe cheap eBooks are the wave of the future, and big publishing conglomerates are shooting themselves in the foot by resisting it. Better to surf the wave than to stand against it. I am attempting the former. Wish me luck!

-TimK

P.S. If you’re disgusted with what Random House is doing to Sophie Kinsella, I sympathize. On the other hand, if you want a fun, romantic e-read, try From the Ashes of Courage. I won’t lie and tell you it’s just like Twenties Girl, because it isn’t. (And BTW, I managed to borrow a copy of Twenties Girl, and I’m loving it! Definitely worth reading.) From the Ashes of Courage is different, but I think it’s just as good, in its own way, because I write the kind of fiction I enjoy reading. Or in the words of one young woman who picked it up and began reading it, “This is really good!”

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Comments

I don’t know about ebooks costing nothing to produce, Tim. Leaving aside the issues of layout and design as well as a cover (yes, you still need covers), there’s also formatting the ebooks for the various readers (and/or programming an app, where applicable (I made a pun!). You also have to submit each book for sale at various venues, as well as the metadata.

Now, were there no ebook babble, this process would be simplified, and perhaps that will be the case some day. But for now, there’s a lot of fiddly stuff, especially if you’ve got illustrations involved. I’ve formatted quite a few e-articles/books for the Kindle, and that can drive you crazy!

BTW, you will find this Sunday’s writing show ep on this subject interesting. A disgruntled ebook enthusiast speaks out–strongly!

Paula, I know that there are fixed costs associated with each reader, platform, and sometimes even vendor. (And I know what you mean about illustrations, even though I have not yet had to deal with it.) For example, I can use the same mastered ebook file to submit to mobi.com and to amazon.com, and that file is usually pretty cheap to put together from the printed layout file. (I can then usually convert directly from .mobi to .epub with good results.) But if I want a title to be available on Smashwords, there’s a whole other process, with its own quirks and issues. Even so, while the publisher does need to amortize those costs over all sales of the ebook, I’m assuming that (especially for a big publisher), those costs are going to be quite low, negligible even. In fact, those costs will probably be less than the typical publisher spends on editing and cover art, not to mention free ARC’s for reviewers and such.

What I meant (and I inserted a few words above to clarify) is that the marginal cost to produce one more copy of the ebook is zero (or close enough to zero as to be negligible). After all, how much does it cost for a CPU to read the bits from one area of disc and send a copy to another location?

I realized today that indeed, for each copy of a Kindle ebook Amazon sells, they have to pay for wireless download to the KIndle. That’s a non-zero cost, but it’s worked in with the distribution cost.

I also don’t know that 99¢ is the right price point. (This is from another forum on which we’ve also been discussing it.) $1.99 or $2.99 or $3.99 (about half the cost of a mass-market paperback?) may be closer to the mark. But I get the feeling the big houses are intentionally overpricing them in order to try to hold back ebook sales. For consumers, that sucks. But for authors like us, that can be a good thing, because it makes it all that much more likely that we’ll be able to sell our ebooks at a reasonable price.

I don’t know what the right price point is. What I do know is that when everyone is freaking out and heading in one direction, the right thing to do is (usually) whatever is the opposite. And 99¢ is just about at the opposite end of that spectrum.

I also think authors should charge something, even if only a token amount, for their ebooks, because in the perception of the buyer, that makes the difference between free and expensive. (Buyers may love free stuff, but if you can convince them to cough up even a dollar, they’ll give your work infinitely more respect.)

One more wrinkle: In June, Amazon will be launching a “70% royalty option” for Kindle titles. Right now, you can list your ebook as high as you like, or as low as 99¢, with a 65% discount. (So Amazon gets 65% of the list price.) But under this new option, if you list your ebook between $2.99 and $9.99, and obey other conditions, they’ll give you 70% of what’s left after the cost to download it to the Kindle. So under this new deal, that’s potentially way more money for you. Sounds like a good deal.

(Here’s the official announcement.)

Their goal is obviously to encourage publishers to price their ebooks cheap. But why a $2.99 minimum? My guess is that they want their cut (88¢ minimum, or thereabouts).

But one of the conditions of this new deal is that “books must be offered at or below price parity with competition.” I assume by “must be offered,” they actually mean “must be listed.” If I list an ebook for $2.99, I’m “offering” it to them for about 94¢. Does that mean I can “offer” the same ebook to end-users on my personal website for only 94¢? Probably not. I imagine that if I list my ebook for the Kindle at $2.99, in order to earn the additional $1.72 on each copy sold (compared to the 99¢ list price), I’ll also have to raise my prices on my own website, and Smashwords, and so forth.

So, is this the end of the 99¢ ebook? Or are authors who sell at 99¢ primarily doing so for volume, and so won’t care about the additional money?

-TimK

P.S. I’ll be sure to check out the next Writing Show episode. Sounds timely.

Hi, Tim,

Thanks for your very detailed reply!

Ah, I thought you were talking about fixed costs. You were talking about variable costs. Yes, you’re right about that: it costs nothing to “print” another copy of an ebook.

Speaking of formatting issues, look at this: http://www.publishersweekly.com/article/450660-O_Reilly_Digital_Distribution_Debuts_at_TOC.php?nid=2286&source=link&rid=16915500. Sounds like a great service, although I can’t tell what the cost is. Will it be affordable for everyone, or just the Random House types?

And speaking of ebook prices, check this out: http://www.mediabistro.com/galleycat/ebooks/chart_that_launched_a_thousand_comments_153521.asp.

I think 99 cents for an ebook is too low. I sell e-articles for that price (you used to have to pay at least $5.00 for an electronic article way back in the day), but books and book-like things I price higher. Never as high as $9.99 because my stuff is so short, although I can imagine pricing robust collections at that level. I do think that Amazon’s $2.99 floor for 70% royalties will raise prices to at least that point. I’ve already been thinking about which items I can raise to $2.99. That 70% is a powerful motivator. If I have to beef up the content to get it, I will. It’s worth the extra work. And everyone wins: customers get better value for their money, and we get better money for our value.

No, I’m sure they don’t mean you have to offer the book for 94 cents. They mean the price to the consumer. No way does Amazon want you undercutting them. If you sell paper books in their third-party marketplace, you can’t offer them for a lower price on your Web site. That was something we encountered when we had our store, and it really annoyed me. There’s no way a customer is going to come to some little store unless it can offer a better deal than Amazon, so essentially they extort you into giving them a commission.

🙂

Paula

I agree the 99¢ is too low for an information-packed, non-fiction eBook, but what about for an e-novel? Your 99¢ writing how-to’s &c are definitely worth at least what you charge.

The chart you linked to was interesting, but I wonder if it’s accurate, because most businesses have much slimmer margins than what this chart claims for mass-market publishing. In particular, I don’t believe the marketing figure, which I think is probably much, much more than they claim.

Of course, what an eBook is worth has little to do with what it costs (except in as much as that affects customer’s perceptions of its value). And if publishers can afford to sell a mass-market paperback for $6-$8 list, they can’t very well justify an eBook (that has fewer options and fewer features) to readers for more than that.

-TimK

99 cents for an e-novel? No way. Better to give it away. Otherwise it would seem like the novel was junk.

There has been a lot of backlash to that charg. I agree that it’s way out of whack.

I agree that what an ebook is worth isn’t necessarily related to its cost. For example, if you can’t resell the book or share it easily, it’s got to be worth less than if you could. However, if there were electronic features of interest to readers that they *couldn’t* get with paper books, the value would increase, perhaps offsetting those negatives.

I was just reading about the possibility for a publisher to link its books together so that customers could use them the same way you’d use the Web. Now *that’s* value. (I suppose that’s the next thing Google will want to do.)

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