Scott Karp on the Profitability of Media 2.0

Scott has a wonderful blog called Publishing 2.0. If you appreciate my blog you’ll really like Scott’s. One of his more recent posts is entitled “What If Media 2.0 Is Less Profitable Than Media 1.0?” He talks about the reduced costs (and profitability) of advertising online vs. via traditional (mass) media. I suspect his short-term observations will hold true in the long term as well.

There are parallels between Scott’s points about advertising and the model in book publishing. For example, I believe that a successful e-book model would probably have to feature products that are lower-priced than their print equivalent. Some publishers are trying to play up the value of the intellectual property and say that the price should be the same for every format. Given that the manufacturing cost of a typical book is approximately 10% of the cover price (rough approximation, no nit-picking on this, please!), you could argue that the e-book price should be approximately 10% less than the print book’s price. (I’m oversimplifying this a bit, ignoring things like DRM costs and the benefit of no excess inventory write-off – to keep things simple, let’s assume these are all a wash.)

Is a 10% price differential on an e-book vs. a physical book significant enough to make the model work? I don’t think so, not as long as the e-book is nothing more than a digital image of the printed book, which is what we see today (e.g., a simple PDF of the physical book). Regardless of the author’s credentials or the unique value of the content, the world has grown accustomed to e-content being fairly inexpensive if not free. Plus, physical books have the benefits of portability (you can read them just about anywhere) and re-usability (after you’ve read it, you can give it to someone else) – these are two key attributes that cause physical books to have a higher perceived value than e-books.

Let’s next assume that the publisher has the ability to sell these e-books directly, cutting out the retailer middleman. This creates a significant savings since the average book in a store is selling for approximately twice the price the store paid for it. (The problem here is that the typical publisher simply doesn’t generate the website traffic levels to compete with Amazon, for example; they also don’t have the depth and breadth of product offerings that you can find on Amazon.)

Combining the 10% manufacturing cost savings and the 50% retailer savings results in a model where the e-book sells for 40% of the price of the printed book. So a $30 physical book has a $12 e-book equivalent, for example.

This sounds good and leaves publishers with roughly the same margins they’ve enjoyed up to now. The big assumption here is that publishers can truly establish a direct selling relationship with their customers. That’s a pretty big leap of faith, at least when considering how the model works today.

A better model is one that allows for a new middleman, one who specializes in e-book sales and doesn’t require the same margins as a physical bookseller. Perhaps they would need as much as 20% of the pie to make their business profitable. Now you’ve got a scenario where that $30 printed book has an $18 e-book equivalent, which is still a pretty good pricing spread…or is it?

Don’t forget that the $30 physical book probably sells for about 35% off on Amazon. Now we’re talking about a $19.50 physical book on Amazon vs. an $18 e-book. The prices just got too close again, unless the e-book reseller is willing to offer everyday discounts like Amazon.

One possible solution: The publisher has to live with a lower price so that the e-book is more of a bargain relative to the printed book. One way to avoid this outcome is for e-books to be something much richer than a simple PDF. The content would have to be reworked in a manner that takes advantage of the e-book device/platform. Links are embedded throughout to related topics elsewhere in the book. Video is integrated to provide a visual way of driving home a point. All this requires more effort by both the author and the editor/publisher, likely causing the publisher to still make less in the long run.

Comments

[Andrew]

As I read the post, I found myself thinking of the e-book as similar to the DVD of a movie. As such, it could include all sorts of extras: deleted scenes, previews of books likely to be of interest to the same readers... None of this reduces costs, but something along these lines might add enough value to make the e-book more attractive, even if its price was similar to that of the dt-book (or whatever we call dead tree books these days).

[Joe Wikert]

Andrew, I agree with you in the sense that we'd need to find a way to add plenty of additional features to the e-book to make it worth the same price as the printed book.