All this is just 10% of a book’s price?

Science Fiction Blog io9 have a gigantic image showing everything that’s involved in producing a physical book and getting it to customers. It covers only the physical book production and distribution and nothing else.

Thanks to Damaso, the crazy good photographer, for the link.

Please take a look at that image. Who in their right mind is going to believe -

  1. Printing Paper Books and Transporting them takes up just 10% of the book’s cost.
  2. Producing and Distributing eBooks costs just as much.

Yet Publishers want us to believe exactly that.

Taking a long, hard look at all the steps in Physical Book Production

Let’s contrast the effort and time and costs involved in physical book production with effort, time, and costs of ebook production.

We’ll focus on the steps shown in the figure at io9 -

  1. Sales, Customer Service, and Support for the person having the book printed. 
  2. Preparing it for printing – The Digital PrePress.
  3. Preparing the Plates for Printing.
  4. The Actual Printing.
  5. Binding.
  6. Shipping and Delivering the Books.
  7. Storage in Stores and Actually selling them.

Sales, Customer Service, and Support

With physical books this step is all about lunch and building relationships. All the costs involved in entertaining each other get listed under ‘book acquisition costs’ and ‘marketing’

Is some of this necessary? Yes.

However, with ebooks we will change the model – making some of these unnecessary.

If an author is having their ebook ‘created’ and it’s their own money then the $1,000 book formatter in Romania is a better choice over the $10,000 book formatter in New York who buys them lunch. Or perhaps it’ll be the $2,000 freelancer in Chicago who doesn’t know anything about sales but does a great job.

Digital PrePress

This is all about checking the digital files and getting them ready for printing.

Will it still be needed? Yes.

However, with ebooks we can introduce some obvious efficiencies -

  1. Since an ebook can be modified any time there isn’t a ridiculously high price to pay if you get a layout wrong.  
  2. Software can replace at least a few of the roles shown in the Image.  
  3. Note that these are all related to making sure an already edited, formatted, and designed book is printed right. These are costs incurred mostly because book printing is a ‘you better get it right or you’ll have 20,000 flawed copies’ line of work.

It’s the fact that tens of thousands of unalterable copies of a book are printed at one time that accounts for the majority of the complexity and costs. With ebooks things are simple and low-cost.

Preparing Plates for Printing

With ebooks we can think of the master ebook copy as the plate. So let’s say this is very similar.

The Actual Printing

Consider all the costs here -

  1. Paper.
  2. Ink.
  3. Power for printing.
  4. Printing machines.
  5. Transporting Paper and Ink.
  6. People to oversee everything.
  7. Machines for drying, folding, and stacking the printed paper pages.

 It’s hard to believe that the entire book production process costs just 10% of the cost of a book. Just this step alone looks like it might cost more than that.

With an ebook we have the super high cost of doing a ‘copy’ of the master file. It’s so inexpensive that you can do it billions of times for the cost of a few hours of electricity.

Binding

You have the material used for the cover and the special printing, the adhesive used, the machines to line up pages and to attach the covers. Plus some sort of quality control.

Shipping and Warehousing and Delivering the Books to stores

After the books are printed -

  1. They are stored somewhere in the printing factory until they are ready to ship.
  2. They have to be shipped – people have to make decisions and put in work to add shipping labels and such.
  3. There are transportation costs.

If a wholesale distributor takes over they take 10% of the book price.  

With ebooks you don’t really have this – You just send one single file per book that’s a few MB or less (with some data such as price and description and meta data) and the ebook store gets everything it needs.

Storage in Stores and Actually Selling Them

Costs that stores incur for physical books include -

  1. Storage Room space and shelf space. 
  2. Employees to move books around and take orders and help customers.
  3. Rent for the store.
  4. Electricity costs and everything else.
  5. Marketing and other costs.

In fact the costs are so high that half of the book’s list price goes to stores.

With eBooks you have the supposed huge costs of creating a webpage for the book, paying for web storage, and costs of maintaining the servers.

Let’s be frank here - claiming ebooks are expensive to store and distribute is nonsense.

Lots of companies are offering free video downloads and free blogs and free email. This isn’t as huge a cost as Publishers paint it to be. It also scales up remarkably well - For every additional book you just need a single webpage and a single file and there’s unlimited shelf space.

3 possibilities when it comes to physical book production and shipping

After looking at that gigantic image of book production tasks and comparing those tasks and costs with ebooks we are left with just three possibilities -

  1. Publishers are so unbelievably efficient that printing books and shipping them costs just $1 per book for paperbacks and $2.50 a book for hardcovers (10% of the list price). All the myriad costs per book above are covered in that small amount and that’s all that’s saved by moving to ebook publishing.   
  2. Publishers are so terrible with ebooks that they manage to spend just as much on producing, storing, and distributing ebooks as they did on physical books. In other words it costs Publishers just as much to copy their master ebook file once as the production cost of an actual physical book ($1 to $2.50).
  3. Publishers take us for fools.

If it’s 2. or 3. then Publishers don’t deserve to survive. If it’s 1. then we have our trump card.  

eBooks and the Magic Factor – Zero cost Returns

While Publishers are claiming that book production and shipping accounts for just 10% to 20% of the price of a book even they admit that returns make up a larger part.

With ebooks returns cost nothing – there is nothing to ship back, nothing to destroy, no wasted paper and ink. There is no money lost.

Ken Auletta’s article in the New York Times defending Publishers had this gem -

On a twenty-six-dollar book, the publisher receives thirteen dollars, out of which it pays all the costs of making the book.
 
Bookstores return about forty per cent of the hardcovers they buy; this accounts for $5.20 per book.

So … perhaps you really aren’t saving any money by moving from physical books to ebooks when it comes to production and shipping.

What about returns?

What about that magic $5.20 per book that returns are costing you?

Reality – Times Bestselling Author’s Earnings

Tons of credit to Lynn Viehl for disclosing her figures (thanks to Publetariat for the link).

 First some context:

  1. Lynn Viehl hit the top twenty New York Times mass market bestseller with her book Twilight Falls.  
  2. It was the sixth novel of her Darkyn series.
  3. She talked about The Reality of a Times Bestseller in April – discussing her royalty statement and earnings from the book.  
  4. She also talks about her new royalty statement this November.

How much did Lynn Viehl’s Times Bestseller earn her?

April Statement Earnings 

  • July to November 2008 – 64,925 books sold.  
  • Credit for only 43,785 sales (rest held back for later).
  • Net Earnings – $27,721.  
  • Advance of $50,000 means those earnings went towards paying for the advance.

Here’s the actual royalty statement.  

She says that after agent fees of 15%, taxes, etc. she netted only $26K of her $50K advance.

She puts it quite succinctly -

This should also shut up everyone who says all bestselling authors make millions — most of us don’t.

November Statement Earnings

  • December 2008 through May 2009 - 7,550 books sold, 10,812 copies returned.
  • Credit for 21,140 copies released, and credit for 13,790 copies held back.
  • Net Earnings – $2,434.38. 
  • Still paying off the advance.

Here’s the royalty statement.

She brings up an interesting point -

my numbers overall probably run lower than most of the other authors on the list (of course if any other Times bestseller authors out there want to post their royalty statements, we’d all love to see the real numbers so we can establish a range.)

Obviously the top few bestsellers must be selling a ton more copies.

It’s a harsh dose of reality to see that even a New York Times Bestselling Author earned just $25,000 or so from her book in 1 year.

The Trickle-Through of Value

With Total Sales of 89,142 copies, the amount users paid for the book is $713,316. This is a simplification and any sales will be borne by retailers from their share.

Here’s the break-up -

  1. Retailers and Distributors – $209, 476. 
  2. Publisher – $453,840. 
  3. Author – $50,000 (Advance).

Lynn Viehl says she’s a mid-list author and there was no big marketing push done for her book.

In return for the advance of $50,000, a sort of guarantee, what we get is -

  • The Author is giving away 93% of the value she’s generating. 
  • Given that it’s the sixth novel in her series and there was little marketing - Why give away 93% of your value?

Why is a Times Best Selling author giving away 93% of the value she creates?

There are a lot of strange things going on here -

  1. How can you sell nearly 90K books and earn just $25K in profits?  
  2. Is there any other business in which Creators get just 7% of the value they create? 
  3. The Publisher made somewhere between $300K and $450K – for what?
  4. Why do bestselling authors have to subsidize failures?

If the Publisher isn’t doing all that much why not go indie and sell in the Kindle Store and push books yourself?

With ebooks we are going to see this transform. There are three possibilities -

  1. Authors start getting 80% of the value. 
  2. eBooks get devalued to 10-20% of their current value.
  3. Value of eBooks transfers to other areas and new middle-men emerge to capture 80% of the value.

The third is the most likely. Unless …

Could we possibly get a Craigslist equivalent for Books?

A company that will take a 5-10% cut and leave the rest for authors (or author-publisher combinations).

Is it really that difficult to -

  • Let authors upload a book. 
  • Store and Show eBooks.
  • Let readers buy a book. 

Currently curation of books and getting the books to readers is eating up 93% of the value.

My gut feeling is that a company could take this to where only 10-20% of the value was lost – the remaining 80-90% would go to authors (or to author-publisher tie-ups that had a 50-50 or better split).

A Publishign start-up could even get away with a 50-50 split.

However, why do that when …

Stealing Value from Authors is so easy

We’re talking about a situation where even best-selling authors are getting only 7% to 10% of the value they create.

It’ll take a really long time for authors to even understand that all the value is being created by them.

Now that we’re moving to ebooks it should become painfully obvious that authors are creating the value.

Here are the various arguments you get -

  1. Being able to store and distribute books is so crucial. 
  2. It’s the Publisher/Site/Distributor/Retailer’s brand.
  3. Searching for books is so crucial. 
  4. It’s the medium that’s important.
  5. Content has no value.
  6. Most of all, Books have no value.

However, the truth is

There’s still money to be made in Books

Obviously, someone is going to make money from books – some of the most forward thinking companies in the world i.e. Google, Apple, Amazon are getting into books and content.

Surely, they aren’t doing it for charity.

Both Steve Jobs and Sergey Brin think that no one reads any more – so they aren’t doing it for the love of books or for readers either.

The only possiblity is they see a huge money making opportunity.

There are two questions it would be great to get answers for -

  1. Who’s providing the lion’s share of value to users – is it Authors or is it the people  who deliver the author’s writing to readers? 
  2. Who’s going to be getting the lion’s share of the profits?

Book Cost Analysis – Cost of Physical Book Publishing

The controversy over Kindle Edition book prices brings up the question of what physical books actually cost and what elements ought to be improved and/or eliminated when it comes to Kindle Editions.

In particular -

  1. We really need a listing of the costs involved in producing and selling a physical book.  This post covers that.
  2. It would also be good to know what creating, distributing and selling Kindle Edition books costs, and how these costs interact/overlap/stack with the costs of producing a physical book. That’s something we’ll look at soon (although not in this post).

First, let’s look at -

A Simple Model of Book Costs and an Example

The very simple break-up is -

  1. Author – Creation. 8-15% Royalties. 
  2. Publisher – Being the Curator, Polishing, Manufacturing, Marketing. 45-55% (includes Author’s Royalties).  Note that Printing accounts for just 10% of the book price.
  3. Distributor – 10%. 
  4. Retailers – 40%. 
  5. Consumers. Just the paying part ;)

An example found at BookFinder states a cost break-up that closely matched what my research turned up -

  1. Book Retail Price: $27.95.  
  2. Retailer (discount, staffing, rent, etc.) – $12.58.  That’s 45%.
  3. Author Royalties – $4.19. Exactly 15%.
  4. Wholesaler – $2.80. Exactly 10%.
  5. Pre-production (Publisher) - $3.55. That’s 12.7%.
  6. Printing (Publisher) – $2.83. Translates to 10.125%.
  7. Marketing (Publisher) – $2.  That’s approximately 7.15%.

Note that the 3 Publisher Costs add up to approximately 30%. There doesn’t seem to be an entry called Publisher Profit.

Detailed Analysis of Cost of Book Publishing

The most helpful sources for figuring this out were -

  1. TeleRead’s Calculating a Fair Price for Ebooks post and discussion. 
  2. WriterBeat’s Profit and Loss Analysis Post
  3. Salon’s post on Why Books Cost So Much.

There are a ton of different sites that had valuable information and if there is information from your site without an attribute please leave a comment and I’ll add a link.

Let’s look at all the stages of a book’s creation, distribution and sales, and the costs at each stage. For simplicity we’ll look at a typical book published by a Large Publishing House -

Creating the Raw Book

Owner: Author.

Cut: Advance + Royalties of 8-15%.

Costs:

  1. Author’s time and effort. 
  2. Agent. For Large Publishing Houses this is usually a pre-requisite. 
  3. Publicist (if employed).
  4. Marketing Costs (If author does marketing  in addition to publisher).

Notes: Advance and Royalties work in this way -

  1. Authors get an Advance. After book sales have covered the advance they get royalties.
  2. Royalties are usually 8% for the first 100,000 books and 10% after that.
  3. Successful authors, well known authors etc. get 15%.  
  4. Agents usually work for a percentage of author’s earnings. Its possible to get a lawyer (instead of an agent) at an hourly rate to negotiate your rights etc. with a Publisher.

Book Screening and Acquisition – Picking a Book to Publish and getting Book Rights

Owner: Publishing House Editor and Chief Editor.

Cut: Falls under Publisher’s Cut, which is 45% to 55%. This includes the Author’s Royalties.

Costs:

  1. Staff Costs of sifting through books – Editors, Chief Editors.  
  2. Staff Costs after a book has been selected and a deal is being negotiated – Editors and Executives.
  3. Lawyer Costs (when applicable) for signing agreements and securing copyright on books.
  4. Advance to Author.

Notes:

  1. The number of manuscripts (solicited and unsolicited) that publishers go through is huge.
  2. Book royalties have to initially cover the author’s advance – Authors get paid royalties on additional book sales only.  
  3. Most books are not successful and publishers do not earn back the advance (not to mention other costs of publishing them). Authors get to keep the advance even for failed books.  
  4. As opposed to the Kindle Store where there is little cost to add a book, every book that is published is a non-trivial investment of time and money.

Successful Books Subsidizing Failures

Owner: Publisher

Cut: Included in Publisher’s Cut.

Costs:

  1. ‘Tax’ winning books must pay to make up for failures.

Notes:

  1. A book’s cost, or to be more precise, the Publisher’s Cut, includes a multiplier to account for this ‘subsidy’ that successful books must pay.
  2. Consider the Venture Capitalist investment model. For every 10 investments, they make back money on 2, lose money on 7, and 1 is a runaway success that pays for the failures and makes them money.
  3. Publishers have a similar model and every book they acquire might be the ‘runaway success’ that supports 7 (or more) losers. This is factored into the publisher’s cut.

Finishing the Book

Owner: Publisher (working with the Author).

Cut: Included in Publisher’s Cut and Author’s Advance/Royalties.

Costs:

  1. Editing.
  2. CopyEditing.
  3. Proof Reading.
  4. Cover Art.
  5. Illustrations.
  6. Book Design including Cover Design, Font, Spacing, etc.
  7. Book Jacket and Inside Jacket.
  8. Getting Blurbs and Reviews from successful authors etc. This includes the cost of sending out galley copies to these authors.
  9. Cost of getting an ISBN.  
  10. Staff Costs – All the editors, artists, and everyone else.
  11. Staff Costs – Loads of support staff including Contract Manager, Arts Director, Royalties Manager, Sales Manager, Production Editor, Rights Manager.

Notes:

  1. It was interesting to see that there’s so much that goes into taking an acquired manuscript and creating a finished book.
  2. There are a lot people involved and lots of managers and executives.
  3. Large Publishers have in-house printing presses. So the next stage is all-Publisher.  

Printing the Book

Owner: Publisher

Cut: Included in Publisher’s Cut

Costs:

  1. Paper. 
  2. Ink.
  3. Scheduling Costs (for the printing presses).
  4. Setting up Plates for printing. 
  5. Press Time.
  6. Binding.

Notes:

  1. Printing costs vary according to type of paper, type of cover, number of pages, etc.
  2. Number of pages varies according to the book and its formatting – spacing, font, etc.
  3. After books are printed, they usually have to be stored in a warehouse, packed and shipped to a distributor. These costs are sometimes covered by publishers. 
  4. For larger print runs, the cost of printing a book comes to just 10% of a book’s price. So the perception that ebooks should be a lot cheaper than physical books because there’s no printing or binding is inaccurate.  

Book Distribution

Owner: Distributor

Cut: Distributor usually gets 10% when dealing with Large Publishers.

Costs:

  1. Getting the books from publishers (sometimes covered by Publisher).
  2. Warehousing the Books.  
  3. Packing and Picking Fees.
  4. Shipping Costs to get books to all the retail locations.
  5. Working with all sorts of book retailers.
  6. Printing Catalogues for retailers to choose books.

Notes:

  1. Baker & Taylor is one of the main distributors - its the main distributor to Libraries, and also a big distributor to Retailers.
  2. Ingram is the other huge distributor and describes itself as the largest middleman in the market.
  3. Distributors take a HUGE cut from smaller publishers and self published authors (40%-60%). Not sure why it’s just 10% from larger publishers. 

Book Retailing

Owner: Retailers

Cut: Varies. Around 40% for book-stores, up to 60% for general retailers.

Costs:

  1. Warehouse. 
  2. Inventory.
  3. Staff.
  4. Marketing the Store.
  5. Building Cost or Rent, Taxes, etc.
  6. Electricity, Phone, Internet, etc. 

Notes:

  1. Book Sales oriented Retailers are claimed to get a 40% cut.  General retailers (like WalMart etc.) supposedly take up to 60%.
  2. The rumored market share for books retail is Amazon 8% of the market, BN.com 2%, Barnes & Noble and Dalton combo – some portion of 25%, Borders/Walden - remaining portion of 25%, Independents 5%, Libraries 10%, etc. 
  3. Harlequin has tie-ups with grocery stores and drug stores so Ingram etc. talk with Harlequin too.
  4. WalMart, Sam’s Club, and Target are the other major retail outlets – since they sell other items too, they get a larger cut so books can compete with music and clothes for shelf space.

Book Marketing

Owner: Publisher.

Cut: Included in Publisher’s Cut.

Costs:

  1. Publicity (in addition to Author’s Publicist). 
  2. Galley Copies for reviewers.
  3. Marketing Staff for the Publisher.
  4. Sales Staff for the Publisher. 
  5. Print Catalogues. 
  6. Ads.
  7. Author Book Tours.
  8. Getting Shelf Space, coop (money to retail outlets for advertising) and incremental coop.
  9. Printing Ads and Flyers for distributors etc. 

Notes:

  1. One huge advantage of going with a Large Publisher (along-side the reputation/credibility) is the amount of marketing muscle and know-how they can bring. 
  2. Publishers have to decide what books to support with a marketing push, and their analysis of your book’s likelihood of success factors in heavily. 
  3. Without getting a Large Publisher, or giving a distributor like Ingram a large cut, it’s almost impossible to get Shelf Space in stores. 

Book Returns

Owner: Publisher

Cut: Comes out of Publisher’s Cut.

Costs:

You make no money on a returned book. In addition there are -

  1. Shipping costs.  
  2. Warehouse Costs.
  3. Staff Costs for handling these returned books. 

Notes:

  1. Returned books have to either be sold at outlet stores (at lower prices and sometimes at a loss) or destroyed. There were two different statistics here, which might or might not make sense together. The first is that 20% of shipped books are returned. 
  2. The second is that only 1 out of 3 paperback copies sells, and the remaining are either sent to outlet stores, remaindered (i.e. destroyed) or returned. 
  3. Books sold at outlets usually incur losses. Books that are remaindered/destroyed obviously incur losses.
  4. These losses have to be covered by the earnings from books that are sold.  

Customer’s Acquisition Costs

Owner: Reader/Customer.

Price Paid: Book Cost, and some expenses in addition to book cost.

Costs:

  1. Book Cost.
  2. Time to find and get book.
  3. Driving to the Store.
  4. Taxes on the book.
  5. Reading Means – For a physical book this is free.

Notes:

  1. This factor is not considered much. However cost to end customer becomes important when we start comparing brick and mortar stores with online stores, and physical books with Kindle Edition Books.
  2. Customer Convenience will become increasingly important as technology makes other purchases faster and easier.

5 Thoughts about Physical Book Publishing

  1. There are a lot more stages and costs than anyone would imagine. This convoluted process can be optimized in innumerable ways – Mr. Bezos would be hard pressed to find a more ‘improvable/kaizenable’ business model.
  2. Everyone who works for publishing companies claims that there is little money to be made and everyone does it for the love of it. Not sure if this is a function of profits not being shared with employees or there simply are no profits.     
  3. There is huge consolidation of power -
    10 or so publishers and 2 or so distributors seem to have cornered the market. While retail outlets are more spread out, the majority of retail is again owned by giants. The trifecta of publisher-distributor-retailer controls the market and each gets a large cut.  

  4. The number of people employed is staggering. A bail-out for Publishing doesn’t seem as crazy an idea.
  5. Looking at optimization opportunities, a few jumped out immediately -

    * Moving away from physical objects – The number of times a physical book is shipped, handled, stored, warehoused, inventoried is ridiculously high.   

    * Book Successes having to pay for Failures – The Internet allows for crowd intelligence, faster feedback, and a lot of other means to reduce the number and cost of failures.

    * Book Returns – Every 4 copies of a book that are sold have to pay for the 1 copy that has to be returned (not to mention the returned book’s shipping, warehousing costs).

    * Amount of Manual Labor – There are a TON of people involved in the book creation, distribution, and sales process.

    * The fact that a book takes 16-18 months after being acquired to get to stores.

My main closing thought is that Kindle Edition books and Kindle DTP are going to destroy the current model of publishing. In the ruins of the old model there will be a huge number of opportunities (such as selling customizable book covers and cover design services). Amazon and the Kindle will basically replace the publisher-distributor-retailer trifecta.

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