Where’s the Value in E-Books?

Old Book Spines

There’s an interesting scuffle going on today between Hachette Book Group and Amazon.   In a nutshell, Hachette is trying to negotiate greater profits on sales of e-books.  Amazon is trying to keep more margin for themselves, and as part of their negotiating strategy, has supposedly limited distribution of some Hachette books through their warehouses.

There has been an outcry from the general public about Amazon’s tactics.  We don’t think it’s fair that they interfere with customer orders to provide a negotiating point.  (To be fair, I just took a look at Amazon and did not see evidence that they were holding up order flow on the bestsellers I checked.)  In the media, Hachette is spinning a tale of themselves as “David” (approximately $2.8B in revenue) to Amazon’s “Goliath” (approximately $78.1B in revenue).

The fight between Hachette and Amazon is not what this post is about…

Instead, this fight has started me thinking about value, and fairness.   In my work, I often help businesses think about their “value proposition” and explore a price range that reflects the value they add to the product or service.   Here’s my take on how value flows through book publishing:

  • An author writes a book, serving as the CREATOR of value in intellectual property.
  • Publishers – in this case both Hachette and Amazon – serve as the MARKETER to spread the word about the book to the otherwise-unaware, book-buying public.
  • Publishers – in this case both Hachette and Amazon – serve as the MANUFACTURER, providing the means of production for hard copies or e-books.
  • Distributors – in this case we’re talking about Amazon, with about 40% of the book distribution market – serves as the DISTRIBUTOR of the book, delivering it to the hands of waiting readers.

Each step along the way creates value.  The author can’t sell books without marketing and distribution.  Amazon can’t distribute books without the author.  Hachette can’t sell books without authors and distributors.  Each step takes time.  So what if we took a look at the contributed hours, to determine who should get the biggest pieces of the value pie?

Printed Book Hrs of Effort for 100K books % of Time Contribution
Author (Creation)                              1,000 46%
Publisher (Marketing)                                  120 5%
Publisher (Manufacture)                                  400 18%
Amazon (Marketing)                                    10 0%
Amazon (Distribution)                                  667 30%

 

Let’s say it takes 1000 hours to write a book.  Many authors will argue that it takes far longer, but some authors can do it in less.  Let’s say that the publisher has someone spending five hours per week marketing and promoting the book, for about 24 weeks.   Let’s say that it takes 400 hours to print 100,000 books.[1]  Let’s assume that Amazon has someone spend about ten hours setting up a sales page for the book.  (I think I’m being generous here, but would be happy to hear expert opinion).  And let’s assume that Amazon spends 667 hours[2], pulling those 100,000 books off the shelf and sending them to eager readers.

In the chart above, I’ve assumed that our printed book is going to sell 100,000 copies.  That’s a pretty big assumption for most authors, whose books typically sell something like 1000 copies.  But we’re going to try to be fair to the publishers here, since they are the ones rolling the dice when they publish a book.

If my value calculations work out, this means that the author contributed 46% of the time-value in the book, the publisher added 23% of time-value and the distributor added 30% of value.  In my drastically over-simplistic view of value and pricing[3], that says that the author should be reaping 46% of the revenue from their creation.

Do they?

No.  For printed books, authors often get royalties of 3-12% on the sales price of the book.   The arrangement between Amazon and publishers is proprietary information, but from what I can tell, Amazon might be getting something around their 30% “fair share”.   Publishers (who, to be fair, have the highest hard production cost for the printed book) are taking a much bigger piece.

Let’s take a quick look at e-books, which started today’s little scuffle in the first place:

E-Book Hrs of Effort for 100K books % of Time Contribution
Author (Creation)                              1,000 93%
Publisher (Marketing)                                    50 5%
Publisher (Manufacture)                                     – 0%
Amazon (Marketing)                                    10 1%
Amazon (Distribution)                                    10 1%

 

According to my admittedly simplistic view, publishers should be taking a small cut for marketing chores.  Amazon should get a couple of points for marketing and distributing the e-book.  Authors, who create most of the time-value, should be getting 93% of e-book revenue.

Do they?

No.  Even in instances where there is no traditional publisher – like Amazon’s Kindle Direct Marketing (KDM) – the author gets 35-70% of the revenue and Amazon keeps the rest.   (This explains why KDM is growing every day.)  When a traditional publisher is involved, word on the street is that the author’s cut drops to 1-6% of revenue.

This is the debate we should be having.  We should be asking why authors, who created fresh and unique content, are not receiving a fair piece of the pie.  In contrast, software companies, which came into being after the days of starving artists being supported by wealthy patrons, have figured out how to keep the lion’s share of profits from their intellectual property.

We should be thinking about how to rationalize the money in publishing so that authors can get a more equitable piece of the pie.  It helps drive a spirit of creation and innovation that we desperately need for society and economy to function effectively.   And, it’s remarkably fair…

 

photo credit:  http://www.flickr.com/photos/31246066@N04/4785035201/

 


[1] It’s just an educated guess, but I know that there are offset printers that can produce 90,000 pages per hour.  So I did some basic math to come up with my assumption.
[2] Amazon’s claim is that they can pick 160 items per hour.  I backed that off to 150 per hour and did the math.
[3] I haven’t factored in the hard costs of printing or distribution and that’s just not fair. J

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