Is the eReader Financial Model Upside Down?

I finally started listening to the free audio version of Chris Anderson's latest book, Free.  I'm only a couple of chapters in and it's interesting so far but since I downloaded it months ago it (once again) shows just how much I tend to ignore all the free stuff I'm hoarding, especially iPhone apps.

That's probably a worthwhile subject for a future post...  For this post, I'd rather think out loud about altering the pricing models for e-reading devices and e-content.

I won't buy a Kindle edition of a book that's more than $9.99.  Why?  Besides the fact that I'm a cheapskate, I guess I'm still bitter about paying almost $300 for an original Kindle, so I expect to "make it up" with cheaper content.  I wonder how many others like me are out there.

I'd say quite a few.  Look at the Kindle book bestseller list.  Even though there are plenty of Kindle editions priced above $9.99 they rarely make the bestseller list.  In fact, as I type these words 14 of the top 25 have a price of $0.00, one is $0.01 and the rest are at or below $9.99.  I only found three books in the top 100 priced above $9.99.  Three.

Why can't a device vendor go with more of a cell phone model, where the low price of the device is subsidized by the longer-term commitment to buying content?  How many Kindles do you suppose Amazon could sell if they priced it at $99, or $49?  The device costs more than that to make, not to mention the cellular charges they pay Sprint, so why would Amazon price device so low?  Hoping that they "make it up in volume" won't help...they'll just lose that much more money in total.

But what if all the ebook editions Amazon sells for the Kindle weren't $9.99 but something much closer to the print book's price on Amazon?  So a $30 book at 33% off would be $20 for the Kindle edition (as opposed to $9.99 currently), pretty much the same as what you'd pay for the print version.  Now there's a bigger margin left over for Amazon to keep part of (to cover the loss on the sale of the device), share some with the publisher/author and even pay Sprint.  And oh, btw, we'd put an end to the model where some publishers are delaying the e-version so as not to cannibalize the print version's sales.  Publishers would be indifferent, if not prefer the e-version since there's no cost for manufacturing, inventory or returns.  Hallelujah!

Additionally, in order to qualify for that low price on the device, the customer would have to commit to a minimum volume of econtent purchases over the next 2 years.  Opt out early and pay a penalty.  It's sounding more and more like a cell phone plan, isn't it?

What's not to like about this model?  The first vendor to adopt it would likely sell a boatload of devices, maybe more than they could manufacture.  It would also protect the value of the intellectual property.  Amazon's $9.99 price on Kindle editions is really cheapening the value of the content.  I used to think it was OK because you can't share an ebook with a friend, but B&N is about to address that problem with the Nook (sort of).  I still think we publishers need to figure out how to add value to ebooks and not just live by quickie p-to-e-conversions, but that was the subject of at least one earlier post.

What do you think?  Is this in the cards?  Will a hardware vendor go this route?  I sure hope so.

Comments

[Will Entrekin]

I don't dig this model at all. It sounds too much like those old Columbia House CD clubs people used to enroll in back when people used to, you know, use CDs. E-book readers are currently priced decently, considering that an iPod Touch or other portable media player can start at two hundred bucks.

I think the problem with e-reader devices is that it's something readers have never had to purchase in the past. We've always had to buy something to consume other media; a VCR to play VHS tapes, a Walkman for cassettes, an iPod for mp3s--without those devices we couldn't use the media in the first place. We need televisions for DVD players, speakers for music.

Not so with books. Books are complete in themselves. The idea of requiring something new with which to consume printed information has so far been foreign.

Publishers and Amazon alike need to treat e-books that way and price them accordingly. Why would anyone spend that much on a digital file it costs basically nothing to produce? One can purchase DVDs at Best Buy for $5, with new releases for $20; even that is too steep for books. I think e-books should be priced like paperbacks or remainders (the latter of which they will basically obviate, since you can't remainder an e-book), and treated basically as an impulse purchase. I never pay full cover price for a hardcover unless said book is either out-of-print or signed; otherwise, I wait until I can pick it up for a penny from the Amazon Marketplace.

I don't understand why publishers have to "add value" to e-books. Aren't they valuable enough? When was the last time you carried a library in your jacket pocket, or increased the font size in that Grisham book you were reading? Or the last time you were reading a magazine, read a book review that intrigued, clicked to order it, and finished the first chapter, all in less than a minute? The value is portability, speed, and convenience; anything else, like so-called vooks, is just gimmick-icing on a cake.

[Kevin]

I'd love to see a subscription based model become available, something similar to netflix... you pay $x.xx each month, and get X downloads, which you can then have on your device for 2 weeks, a month, forever... To me, that would be worth getting.

I've heard that the nook is going to have bundles available, where you pay a little more and get both the physical book as well as an ebook. I think with that business model, you could charge a little more, because people know they are getting something they can physically hold onto.

[Don Linn]

Agree 100% Joe. This should be the cheap razor/expensive blade model. Why all the device makers are working the reverse strategy is a great mystery to me.

[April L. Hamilton]

Joe, I've always wondered at this myself since it's been such a successful model for new tech+content platforms in the past. Right now, the device cost is a barrier to entry. But if the device is under $100 and users can get content at a reasonable cost, you've just converted MANY more consumers.

I think too many ereader interests are trying to follow the iPod model in terms of device pricing (premium product at a premium cost) + low-cost, per-item content pricing, but that's not really a fit for books because people aren't used to a pay-per-chapter pricing scheme the way they're used to a pay-per-track pricing scheme. Besides which, pay-per-chapter isn't truly an option the way pay-per-track is, since (except for essays, short story collections and reference books) individual chapters can't generally stand alone the way individual songs can. If you like the book, you have to buy all of it to enjoy it.

[April L. Hamilton]

Will Entrekin raises a good point that had never occurred to me before: DVD pricing. While new release DVDs run between $16-$20, and new release Blu-Rays come in around $25-$40, you can get a decent DVD *player* for as little as $40 and an entry-level Blu-Ray player for around $100. And within 6 months of their initial release, DVD titles are available for $10-13, sometimes less. Blu Ray discs will soon follow suit, if media history is any indicator.

From the media consumer perspective, why should the cost of owning and reading a book be any higher than that of owning and watching a movie? Playing the devil's advocate, I could make an argument that since studio movies cost an average of around $40 million to produce, millions more to distribute and millions more to release on DVD, and it's the exceptional book that costs anything more than $1-2 million to produce and distribute (and most cost far less than that), books should cost far LESS to own and enjoy than movies.

Of course, I realize this is not an apples-to-apples comparison and there are factors at work in trade publishing the typical consumer doesn't understand. However, consumers shouldn't *have* to understand the economics of trade publishing; if the consumer *believes* you're overcharging, in terms of making the sale versus not making the sale, you are.

[Martin Kochanski]

In that case Amazon will have to ban vendors from supplying cheap content for the Kindle, including freezing out all the public-domain stuff. And the public-domain stuff is what sells a lot of people on getting something as expensive and ugly as the Kindle in the first place.

[morris rosenthal]

Joe,

I'm no fan of low priced eBooks, but looking at top sellers on Kindle isn't so useful because free, after all, is free, and many people downloading those eBooks are unlikely to read them. As Chris points out in his free unabridged audio book (I listened to the whole six hours:-), advertisers pay higher rates to advertise in publications with paying subscribers, because they know many people treat the free pubs like toilet paper. In a sense, it's impressive that any of the $9.95 bestsellers stay in the top 25.

Morris

[twitter.com/erinthorsby]

I absolutely agree about not purchasing high-priced ebooks, Joe, although for me it's more from a customer's perception of value. I find it hard to reconcile buying, for instance, a copy of Stephen King's new Under the Dome for my Kindle at the same price as a beautifully bound and packaged hardcover version of the book-- both were originally priced at $35 (http://www.huffingtonpost.com/2009/10/21/stephen-kings-new-e-book_n_328832.html). Just like prices went down on music (looking at price-per-track rates) because consumers found they could buy more efficiently by getting mp3s, digital editions of books should go down to accommodate consumer desire for streamlined book buying. A digital copy of a painting gives the owner the same technical value as a print of a painting, but one has a definite material value that the other does not.

I'm not sure that a higher price value instills greater intrinsic value in the average customer when it comes to books (in reference to your "cheapening the value" comment). A reader who just paid $250 or more for a device wants to get as much use out of it as possible, which they're not going to get if digital books are being priced as they are. Since books aren't priced based on quality of the writers, then keeping digital books at or above a certain, fairly arbitrary, price that does not match material value deters the possible growth of digital book sales among prospective consumers.

[twitter.com/chownage]

If this existed today, I'd do it in a heartbeat, BUT, I'd want my $9.99 software too.

[Bill]

I think the pricing will eventually work its way out...and everyone (authors, publishers, retailers, consumers, etc.) should work to be a part of that process.

I definitely agree with the first post by Will Entrekin. I am not old enough to know if someone once uttered, "You mean I have to buy a record player to hear the music on this album?"

As for "if the consumer believes you're overcharging...you are," this is not necessarily true, it could be that you just haven't properly "sold" the consumer.

Apple iPods and iTunes is a better example than wireless phones and carriers.

It's exciting to watch!

[Ron]

Joe,

I think you are on to something with this model, but I think that the price for the ereader is probably about half of where it is now, say $125-175. I don't think that the $9.99 books should be altered because as you commented above, the publisher has only the one time electronic set up of the book with no cost of printing and/or reprinting. I will admit that I do not know the what the cost of set up for an e-version of a book would be but I would be correct in saying that the break-even point would be significantly less than printed books.

I have not considered the impact that B&N's sharing will have on the market, but possibly it will be the same as you buying the book and then passing it around to all your friends.

I am opting for the Nook this Christmas as I look to break into the ebooks to save me some money and make it easier to carry books around.

[Peter P]

I agree that your pricing model makes much more sense but I don't think all that many more people would convert until Amazon fixes some of the 'flaws' (missing features) and deals with the whole DRM issue.

Why would I pay for a book I can't lend to my friends and that Amazon has the power to remove from my reader (if they so desire) when I can buy the hard copy for around the same price and do whatever I want with it?

[Michael Banks]

Readers as loss-leaders in order to sell ebooks at a decent price ("decent," as in retaining publisher and author interest) ... I like it!
--Mike

[Charlie]

"Amazon's $9.99 price on Kindle editions is really cheapening the value of the content."

Hey, wait a second. Public libraries have been giving away this content for free for centuries. How is downloading an ebook any different to borrowing it from a library? Why should I pay $9.99 for an ebook but still be able to borrow it from a library for free? Public libraries were created on the basis that all books should be available to everyone for free. Until I hear a convincing argument as to why public lending libraries shouldn't exist anymore then I have to say that all reading should be free and authors should be compensated through an expanded public lending right. If publishers want more money then they need to create a product which goes above and beyond the pure reading experience.

[twitter.com/PFNikolai]

I agree that ebook devices need to be $99 or less; is Amazon or the publisher responsible for $0.00 price?

[Preston]

I really have a problem when I see an ebook priced higher than the corresponding paperback. I'm okay with being charged a premium for new releases, but it's downright insulting when a mass market edition undercuts the ebook price. Until publishers figure out how to expand the utility of ebooks, it's not worth a premium price over mass market.

[Michael Miller]

I agree; it should be a razor/razor blade model. Give away the devices and make the money on the content.

Whatever the price, I'm still not sold on the concept of separate e-reader devices. I'm not convinced that the mass public wants (1) a replacement for the printed book or, perhaps more important (2) one more device to lug around. E-books on an e-reader: A solution in search of a problem. E-books on an iPhone: Another deal completely, and one that may have a bright future.

[Francis Hamit]

Until recently, the only e-book version of my novel "The Shenandoah Spy" was on Kindle: The suggested retail price was $12.95 but Amazon marked that down to $9.99 for several months and then had it at full price. It actually sold a few more copies at the higher price and with my other e-books, which are distributed through Ingram I found that price point had no effect on sales. It's the kind of obscure non-fiction material that, if you don't need it, you won't download even for free, and if you do, you'll pay a fair price. For small publishers such as myself the real problem here is multiple formats. Amazon.com likes power games; what is called in Marketing terminology "forcing behavior" aka "Hobson's choice" or "My way or the highway". It should be recalled that they used to sell the e-books that Ingram distributed, but then they decided that everyone had to use Mobipocket. Some of us declined because of the extra work involved. Sales were not as good as expected and certainly did not justify the extra effort. Time really is money. We're not lazy but we're not stupid either. Amazon.com tried this same tactic with Print on Demand. They engage in a lot of rent-seeking behavior. In technology circles, it is well known that if you can define the standard you own the market, and Amazon has tried this time and again to no avail because they don't have that big a market share( nowhere near as big as they make out)and there are multiple competing standards already out there. This is a replay of the BetaMax-VHS war all over again.

The real issue is installed base and whether or not the base considers an e-book reader a primary or secondary venue for reading text. The amount of free and low cost public domain material Amazon floods their catalog with attracts customers, but discourages vendors. Some of us are not persuaded that e-books are really the future of publishing. At best, it's another added channel of distribution, like audiobooks, but certainly not a replacement.

The big mistake here is releasing the e-book at the same time as the first edition, be it hardbound or trade paperback. Amazon has defined the price point as a comparable to mass market paperbacks. In the future I will either hold off the e-book release or simply release an e-book as a "beta" or intermediate work without a print version. Time to market and set-up costs are far less for e-books and people tend to forget that the text also has value and that authors need to make some money from their efforts. This is a business, not a hobby.

Let me add that Ingram Digital offered to do all the file conversions for free for the Sony reader files of our other e-books and that the sales here slightly exceed the regular bookstore channels. None of it sells very well and we now assign a low priority to publishing additional e-books. Absent the widespread adoption of a single standard for e-books (and that was what PDF was originally intended to be) the best way to attract material for e-book catalogs is for the distributors to convert the files without charge and send the checks or e-payments as earned.

[Steven]

I guess I don't really feel like I'm actually buying a book if all I have is a digital file. It just feels weird to pay more than a few bucks for something that doesn't seem 'real' to the human mind

[Account Deleted]

When I was a strategy consultant, this was one of the most intellectually difficult problems. It is pricing of a bundle (of products). If you are a supermarket, do you make milk a loss leader (a traffic generator) or profit leader? Do you make profits from products that everyone buys, or from expensive products that only some customers buy?

After years of trying to generalize, my conclusion is that there is no easy generalization. There are just too many factors to consider, and so the opposite strategies can be the answers in different situations.

In this ebook and reader case, your alternative model seems making sense. When all the others are making device a profit leader and the ebook a loss leader, what your opposite pricing strategy does is to attract different kind of customers. This is always true. When A and B are bundled and people are heterogeneous, two different relative-price strategies will attract different segments of customers. So, they both work. When people are homogeneous, it is not so.

The key is then, how people are different. When there are enough people who don't like the current price combination, your new strategy will attract many people. The best case is, unlike what you may think, when your new strategy is not dominant. That is, enough people still like the status quo prices. Then, you split the market, getting enough for you and leaving enough for them. If you take too many at once, you may be happy for a very short time, but you enter a pricing war.

So, I generally recommend considering the opposite price bundle like your example.

[Bud]

The price point per book is important, to capture
the sales of those that wait until a paperback release
in the first publishing wave. If a publisher gets a book
to chart by including those extra sales, it helps move
their dead tree inventory better. It also helps
with having to worry about keeping a pulp mass market
in inventory, they kee those available as ebooks instead.

On top of that, the real reason is, it is the brand new
title at mass market prices that is the main killer
in the killer business model. Not thirty dollar buy from the ether.