Digital edition price flexibility is not optional

I’m not saying price e-books the same as paper or hardcover editions, but, in response to Rex Hammock, I do think publishers should be thinking in terms of the benefits of greater investment in the production of e-books. Likewise, this posting is a reply to Slate‘s Jack Schafer, who argues that, unless publishers embrace the $9.99 price point, they will be “Napstered.”

As I’ve argued before, the future of business isn’t a price point, but management of value delivered and the cost of delivering it.

Rex responded to a comment of mine the other day, on his posting “Yet one more mystery about the enigmatic book publishing industry,” thusly:

Thanks, Mitch. I appreciate your deep knowledge of this topic. However, I don’t believe you can equate the investment necessary to improve the design of an e-book text with the costs outlined… (read it all, the whole comment thread is worthwhile).

In my reply to Rex, I wrote:

Rex, I’m not suggesting they are the same costs, just that the publishers shouldn’t be looking at this solely in terms of how cheaply they can get an electronic version out. Better copy and enhanced reading experience will make a positive difference in the marketplace.

But, to make my point, let’s take a hardcover as an example….. The paper and printing costs of a $24.95 hardcover are somewhere between $4.60 and $6.00. Except for huge bestsellers, at least a third of the copies produced at that cost will be returned, so the real cost per book because it is in paper and distributed through physical channels is close to $9.50 (including shipping costs both ways). If I sell the books at a 45 percent discount, I’m making $13.72 per copy sold before any costs (incidentally, this is about what Amazon pays publishers for bestseller Kindle titles sold for $9.99). After accounting for returns and the cost of production, my top-line profit is roughly $4.22. I still haven’t paid my G&A, editors, author advances, or for marketing. I might spend less than $2,000 for marketing (there goes the profit from 500 copies sold) many of the titles on my frontlist.

Publishers run a very slim margin, on the first 10,000 copies of that hardcover, they will lose money. Sanford S. Bernstein analysts estimate publishers earn only 26 cents per paper book sold and $2.15 per electronic copy sold. But that doesn’t mean they’d make money on the first 10,000 electronic copies of the same book because the cost structure is different. It’s only when both books make it past their first season and become backlist titles or, if all the stars align, become runaway bestsellers, that I make money. It’s the fact e-books can sit in an eternal backlist and be sold in dribs and drabs for years that make them truly economically magical.

Now, if I chose instead to produce the book as available in electronic format with substantial enhancements (a fully hyperlinked index and TOC, as well as a style sheets for multiple formats and screen geometries, for example), it might take a designer and editor an additional $5,000 to $10,000 to produce the electronic book for the “major” electronic platforms.

For argument’s sake, let’s say I did spend $10,000 on the electronic designs. Compared to the cost of the first 10,000 hardcover books, it looks cheap, but unless I have real clout as a publisher or a proven bestselling author I am still getting only about half the revenue for e-books sold on Amazon. If I sell in other venues and formats, I have to spend some of my own money on marketing to get attention that Amazon delivers simply by being listed in front of so many potential buyers. The typical publisher, then, will probably see top-line revenue close to the $2.15 per copy sold in “earnings” identified by Bernstein’s analysts.

In the end, I only get a margin that after I market my book and the sales channel “dips their beaks” comparable to the physical book top-line, so if I reduce my list price from $24.95 to $9.99, I make less per copy sold before any other costs. Therein lies the reason that open formats, self- and on-demand-publishing, and competing channels are critical to the evolution of publishing, because the price of selling digital stuff remains prohibitively high despite all the prevailing thinking that it is “free.”

In electronic copies, there are no returns. There probably ought to be, since a lot of books and magazines ship for Kindle with egregiously bad unproofed copy (why The Atlantic, which I wrote about today, would not proof its Kindle edition, is beyond me). I get to keep more of my top-line profit as an electronic publisher, but it will still take sales of several tens of thousands of copies to break even on an e-book, particularly if I’ve paid an advance to the writer.

This all supposes there is a reason for the publisher to participate in the process, that there is a good reason for authors to work with editors and marketers. That’s a separate debate, one publishers need to recognize no one takes for granted anymore.

Dissing the e-reader

While reading a very thoughtful article on the economics of education in the Kindle edition of The Atlantic, I ran across the following mangled phrase:

The conventional wisdom is that you get what you pay for.that the larger the price tag, the better the product. But that.s not true in higher education.

The electronic version of the magazine isn’t being copy edited for errors after conversion from the files used to create the paper publication.

Poor quality copy is not going to help publishers solve the problems presented by the transformation of media. Treating the digital text as a quick, cheap copy only denigrates the reader, who is paying for quality writing, the writers who contribute the work, and the staff’s efforts to make a good product. All these are obvious reasons to make the same effort to proofread published material for errors before sending it to Kindle (or any e-reader) owners. The economics of poor quality lead only one way: downward.

The myth of the perfect copy and the future of publishing

There’s a powerful myth in publishing: A copy of a book can be perfect every time. The transition from scribal reproduction to printed books, for example, is supposed to mark a break in the history of knowledge, when “perfect copies” became ensured each time a book went to print. However, it turns out that print compositors, the people (both men and women were active as compositors even in the 16th century) who laid out type, made mistakes or “corrections” to the author’s text quite frequently—at approximately the same rate scribes introduced changes into their texts. Not only from edition to edition, but within editions, because proofing went on while printing continued. The same “book” from one copy to the next, might have different versions of the text because error-correction got out of synch with printing and pagination.

In that context, the ongoing discussion of poorly edited copy and lousy, lazy layouts in e-books takes on a new, but familiar, cast: One of the ways publishers will eventually find a reliable business is by solving the problem of “authority,” the standard on which printed book publishing emerged from the “pyratical practices” of the early print era, when pages were badly copied or simply stolen from the printers by employees and assembled into cheap and usually corrupted editions.

By authority, I do not mean what most of the amateur vs. professional journalism debaters mean: The power or right to declare reality is as they see it. Rather, I mean it in the sense of “speaking with authority,” building a reputation for reliability and accuracy, for service to the reader and authors, in order to make the product you sell—a book—the desirable first choice by a potential buyer. In the 1500s, publishers did this by adding their “mark,” the most famous of which is Aldus Manutius’ anchor-and-dolphin mark, to the frontispiece of their editions.

Unfortunately, marks were easy to copy and discerning buyers had to learn to recognize the quality of a work based on everything from the quality of the paper and binding to the choices in typeface and design that they had come to expect. Those more nuanced details of a book were hard to counterfeit. Ultimately, a combination of guild-enforced “self-regulation” (the true meaning of “self-regulation” that free marketers mean when speaking of the virtues of industries that police themselves—they ensure business conditions are nominal) and persistent dedication to improving the quality of printed works yielded a recognizable set of expectations among readers. We’re now living through a renegotiation of the same magnitude.

Books have always been products judged by quality, consistency, binding, informativeness and the enjoyment provided. Any book manipulated by someone to hide, obscure or falsify its provenance is a less-than-perfect copy, even in digital publishing.

Unfortunately, badly converted texts have become the standard in e-books, because the only variable any talks about today is price. I agree with Joe Wikert, writing at TeleRead, that as long as readers view e-books as only cheap copies of printed books, the problem will continue.

The answer? Better editing is a necessary, but not sufficient condition for publishing success. The simple answer: Invest in something that makes the book more useful than the print edition. Pagination mapping, for example, so that e-books could be used for academic and scholarly citations, would be a good first step. Shoot for making the book a conduit for communication, not just a channel for distribution.

Authority will reassert itself when it has been earned. As long as just putting a different version (one of more than 70 currently) of Pride and Prejudice up on Amazon is considered “publishing an e-book,” readers are doomed to download some really bad copies.

When “evil” destroys dialogue

The term “digital rights management,” or DRM, as the technology used by many publishers to prevent unauthorized copying of their digital titles, is the subject of intensely emotional debate, so much so that the discussion seldom rises above claims that the technology is “evil” or “not evil.” Michael Bhaskar of Pan McMillan leaps into this perennial debate with a nicely reasoned piece that, nevertheless, seeks to justify the idea of limits on use of a text. (TeleRead also likes effort.)

I don’t think DRM is a good idea. It makes using a digital product harder than it needs to be. It also represents the fear among publishers and some authors, that their work will be undermined by people who would give it away freely.

However, DRM is also built on something that could be incredibly useful in a shared e-book, cryptographic identification of multiple readers, so that their annotations and discussions can be parsed logically and presented selectively. I’ve written about this before, in hopes of raising the smog of DRM from the potentially useful features that underlie it.

If the publishing industry let books be copied freely, across more than a few devices, for example, it would create business opportunities by allowing even those who receive a book at no cost to pay a small fee—comparable to the price of an e-book—to add their own thoughts to the page or discuss the book with some coordination provided through cryptographic technology to limit who could see their notes, or selected notes (some annotations may need to be private, because they are controversial or too sensitive to be exposed publicly, but they provide a personal point of reference for framing a discussion linked to the same place in the book).

No, DRM isn’t “evil,” it’s just a barrier to greater use of the text. Turn the whole argument upside down—what could we do with a freely shared crypto-enabled document that let readers integrate their notes and other reading? How could we maintain vast personalized libraries and reference databases secured in the same way that a cash payment at a bookstore provides anonymity?

Then, the problem isn’t unauthorized copies, it is how to identify one’s own copy, so that readers can share and use the information in more meaningful ways. If anyone doubts this is a viable approach, take a look at the growing use of OpenID and Facebook logins to parse and present social relationships with greater personal context online.

Forget “evil,” it’s  meaningless term in the context of computer science.

Vertical markets, services and the challenge of many media

Mike Shatzkin, taking on some ideas posted by Andrew Savikas of O’Reilly, in “Vertical” versus “service”: semantics, nuance, or dueling metaphors?

The clinching metaphor in Andrew’s piece is that we aren’t actually buying food when we go to a restaurant (because, if we were, we’d just buy it at the grocery store.) This is tricky, because, indeed, you do want that hamburger cooked and served on a bun and you want a place to sit while you eat it and maybe some ketchup supplied. So, in fact, you’re buying both food and service. You wouldn’t patronize the restaurant if they didn’t give you the food, so it seems a bit of a stretch to say it isn’t what you’re buying!

The clinching metaphor in Andrew’s piece is that we aren’t actually buying food when we go to a restaurant (because, if we were, we’d just buy it at the grocery store.) This is tricky, because, indeed, you do want that hamburger cooked and served on a bun and you want a place to sit while you eat it and maybe some ketchup supplied. So, in fact, you’re buying both food and service. You wouldn’t patronize the restaurant if they didn’t give you the food, so it seems a bit of a stretch to say it isn’t what you’re buying!

Savikas makes the mistake, I think, of conflating “content” with “creativity” when he writes: “This is not just about using free digital content to sell physical goods. It’s an acknowledgment that what you’re selling as an artist (or an author, or a publisher for that matter) is not content. What you sell is providing something that the customer/reader/fan wants. That may be entertainment, it may be information, it may be a souvenir of an event or of who they were at a particular moment in their life (Kelly describes something similar as his eight “qualities that can’t be copied”: Immediacy, Personalization, Interpretation, Authenticity, Accessibility, Embodiment, Patronage, and Findability).” All content is equal in this argument, ignoring the hard-won reputation that great creativity earns in the marketplace. Moreover, several of the “qualities that can’t be copied” apply to any form of creativity—there is another, not mentioned, Authority, which we attach to a source based on previous experience with them.

In short, engagement with a writer or artist is the ephemeral feature of this commercial relationship that is being shoe-horned into the category “service.”

Further on, in comments, Savikas argues that The Economist magazine seldom publishes “news,” which he apparently equates with “breaking news” or “scoops”, because it is printed on paper. He says he “pays for the preparation” of the magazine, which utterly misses the value of the time and research that go into deep reporting about issues rather than simply reporting the new. Analytical thought requires more work, but the output, if measured in terms of letters on a page, is exactly the same as any other printed information. Savikas’ equation leaves the creator of the work out of the value-chain. And, surely, as Mike Shatzkin points out, Savikas is speaking from his experience of working as a publisher.

Shatzkin argues that the difference between “service” and “vertical,” as in “vertical market,” needs to be acknowledged:

Rarely can”service” be delivered broadly; it has to be targeted so vertical be comes a sine qua non. And anybody really trying to build a vertical will do it by offering service and tools, which they would hope would also lead to the ability to sell content.

This, too, reduces the question of the future of publishing to a paradigm that doesn’t bend, but breaks, when applied generically. Specialization, the essence of the divisions of labor that create economies of scale, is not sufficient to establish a brand without “service” that engages the customer for the full life of the value in information. We go to the restaurant because we want food and service, and we buy a non-fiction book by an author because they promise to make us experts on a topic. In the quick-to-obsolescence world of real-time information, ongoing service may be required to engage a customers’ interest and to provide the full-range of expertise, because some insight only appears in the give-and-take that evolves out of published work.

The useful metaphor stretches further when “service” and “vertical” are tempered into a useful alloy. It allows authors of entertainments—true, some genres are vertical markets unto themselves, but entertainment is also a generic quality attributed across many genres—to offer engagement after the initial text is finished. It could be a signed book, a sort of avatar for having a relationship with the author, or it could include ongoing access to notes and other musings by the writer, simply because the buyer enjoys the experience.

Services and verticals define a variety of market approaches. We’ll be experimenting with the resulting alloys for many years. Which is better, watching Picasso paint or looking at the painting? In our world, both are possible, both are inevitable. Neither is exclusive, though each mode of viewing stands alone.

Global and U.S. advertising spending plunges in 2009

For anyone hoping to refinance publishing on the back of advertising, it may be the best of times to sell a new medium to advertisers, but it is the worst of times for advertising.

Nielsen reported this week that ad spending globally dropped 7.9 percent in the first quarter of 2009. U.S. ad budgets declined by a record 12.7 percent and growth in Chinese advertising, which has been consistently strong since the beginning of the economic meltdown, shrank to only 2.5 percent year-over-year.

All traditional media, from newspapers and magazines to TV and radio, showed marked declines. U.S. magazine revenue shrank by 22 percent; newspaper advertising revenue was down by 15.6 percent. Charts and more here.

Global Publisher Rankings change as Pearson, Reed Elsevier grow

The Bookseller, Buchreport and Publishers Weekly have released their annual ranking of book publishers, announcing that Pearson claimed the top spot from ThomsonReuters on five percent annual revenue growth, to $7.04B. Reed Elsevier, with $6.39B in sales for nine percent revenue growth, took the second spot, while ThomsonReuters fell to third on $4.86B in sales after the merger of Thomson and Reuters in 2008.

A PDF of the rankings by Euros is here and a dollar-denominated version of the report hasn’t been released. I’ll add a link when PW makes this available.

Is “Total Youth Think” the solution to publishing’s problems?

Can the World Young Reader Conference, which will happen in Prague this September, provide actionable ideas for newspaper publishing? According to a recent, cloying Pepsi radio spot, youth does everything worthwhile. I personally prefer to see the wiles of age tempering the energy of youth to produce generational changes that represent the experience of everyone involved, but I’m cranky.

The answer promised in Prague is a “Total Youth Think” that “places young people at the center of a newspaper company’s strategy.” I am struck by the fact that the youth-oriented Facebook is becoming a medium predominantly used by parents and grandparents. The realistic course seems to be designing media for all ages, allowing them to connect. If you design just for youth, your market eventually ages out of your design target.

Presented for your consideration.

Practicing what he preaches: Chris Anderson’s Free book

Chris Anderson’s new book, Free, is available on Scribd for free for a limited time. It is a great promotional strategy for the paper and e-book editions of the book, but it doesn’t answer the question about how to make “free” a sustainable price. The book ventures to answer the question, though I haven’t found substantive answers other than the idea that, once you have an audience, it can be milked.  The limited free access on Scribd may be enough to convert free readers to paying readers, so that they can actually put the text to use, but beyond the promotional value of the short-lived giveaway, it is hard to see what changed. That would make Free a temporary price, not the inevitable answer to building great businesses.

Meghan Keane reports that Anderson answers the tough question with: “Give away the book. And pray.”

Great, a faith-based solution for publishing is exactly what we need.

UPDATE: Publishers Weekly reports that Anderson doesn’t promise any answers for publishing.