The Battle for a Digital Pricing Model that Works Part 4: The Return of the Jedi!

by Rebekah Hunt
According to Mark Coker, founder of Smashwords, the solution to the digital publishing issue is simple. “The day has come,” he says, “for publishers to offer a $4.00 book.” Has Mr. Coker lost his mind, or could this really be the future of ebook pricing? He goes on to elaborate, “Most books are too expensive. Compared to lower cost alternative media sources, books are becoming niche consumables like caviar. The high cost of books jeopardizes not only the future of books, but the future of the book publishing industry. Unless authors, publishers and booksellers cooperate to bring down the cost of books, book publishing faces a painful decline, much as we’re now witnessing with newspaper and magazine publishing.”
The low-cost book concept Coker proffers is not limited to what is good for publishers in the US market, however. “Here in the U.S.,” he explains, “most consumers already think twice before shelling out $7.50, $15.00 or $30.00 for a good read. If a book at the current prices represents a big purchase for citizens of the world’s most affluent economy, imagine the cost burden for the vast majority of the world’s literate people. The growth in worldwide literacy has created a massive affordability gap between those who want books, and those who can afford them. Therein lies both the threat and the opportunity facing publishers.”
There is precedent for the strategy as well, Coker says. “The publishing industry has successfully responded to the price issue in the past by releasing lower cost formats such as the mid-sized trade paperback and the small purse-sized mass-market paperback. Each lower cost format dropped the price 30-50 percent. By offering customers a cheaper, smaller and less expensive format, publishers expanded the available market for their books and enabled a larger number of readers to gain access to affordable reads. Imagine if books were only available in hard cover today. How many current readers would have long ago abandoned print books due to the high price and large size of hardcover? Ebooks are a lower cost format, and therefore may hold the key to the book industry’s salvation.”
But what about the danger that, by setting the price of ebooks too low, the publishing industry might suffer more than it benefits? “Many publishers view ebooks with a skeptical eye,” Coker says. “After all, won’t cheap ebooks cannibalize expensive print books? This is the wrong way to examine the situation. Lower cost ebooks help publishers retain customers who might otherwise abandon books altogether in favor of lower cost alternative media options. Ebooks also hold the promise to expand the worldwide market for books. Hundreds of millions of new middle class and literate consumers have come online outside the US, especially in developing countries.Ebooks offer significant economic advantages to authors and publishers as well. From a production perspective, publishers can convert print books into digital books at very little cost. Once a book is liberated as digital bits, the production, duplication and distribution of the book requires no ink, paper, fossil fuels, shipping boxes, physical bookstores or cash registers. The entire process becomes one of automated online self-serve transactions. Since it costs the author or publisher next to nil to ‘print’ each copy of an ebook, ebooks are extremely profitable on a per-unit basis, even at a low selling price.”
So, what would this type of pricing model really mean to the future of the market? According to Coker, “The advantages of ebook economics will become more apparent as ebooks grow to comprise a greater percentage of book industry sales. Some might fear that $4.00 books will eviscerate the earnings of mass-market authors and publishers. The likely outcome isn’t so simple. For the mass market, if publishers don’t quickly satisfy lower price points, they’ll continue losing customers. Customers who prefer ink on paper will continue purchasing more expensive formats. Not all books should be priced at $4.00. Publishers should segment their markets to ensure they’re delivering a range of products and formats that offer the target customer value that exceeds each price point.”

While the future of the publishing industry as we know it remains uncertain, this uncertainty is more the symptom of a massive evolution in the way books are distributed and consumed, rather than that of the industry’s inevitable collapse. “By offering consumers a low cost digital product,” Coker goes on to say, “the economics of ebooks create a virtuous, self-reinforcing cycle. The low price expands the available market by making it affordable to more consumers; low production and distribution expenses allow the publisher to earn a healthy margin; and the larger addressable market allows publishers to sell more units at greater profit margins.”
When Mr. Jovi accused Steve Jobs of “killing the music business,” whether demonstrating his age or his ignorance of the market, he meant that Mr. Jobs and the iTunes revolution had killed the business as he knew it. This is an important distinction, and one that the publishing industry would be wise to consider. Every few decades the traditional ways of distributing media undergo sweeping change and, despite the prophesies of doom, consumers and businesses have risen to the challenge and found innovative and exciting new ways to buy and sell the media they consume and produce. Yes, the publishing industry as we know it is marching into the tar pits along with the old record company dinosaurs, but it isn’t the end of the industry. It is an opportunity for the evolution and innovation that will allow us to rise to meet consumer expectations and succeed in the vital and rapidly expanding digital universe.
THE END!

The Battle for a Digital Pricing Model that Works Part 2: The Fall of the Old Republic

By Rebekah Hunt
The Economist reported, in August of 2006, that print journalism has been in decline since 1990. Jobs in the industry fell by 18% between 1990 and 2004, Knight-Ridder sold off its newspapers, and New York Times share prices had been cut in half within four years.The obvious explanation, and the one most often given for these trends, is the mercurial rise in internet use over the past decade.
It is most likely true that the free availability of information on the internet has seriously impacted the public’s interest in reading a physical newspaper, adding up to large losses in the newspaper sector. But what about book publishers who, as the Times reports, aren’t faring much better than the papers? Has the rise in worldwide availability of digital media contributed to book industry losses as well? In the same way that Apple killed the arena-rock star, has the internet killed the print media star?
The short answer is yes, but it’s not as simple as that, so don’t go into mourning for the paper trade just yet. According to the Times, a steep decline in paperback book sales began in the 1980s, before the widespread adoption of the internet as a primary media source, “when retail chains that edged out independent bookstores successfully introduced discounts on hardcover versions of the same books.” This accomplished two things: it crippled the already wobbly publishing industry, and it changed consumer expectations of what a book should cost. I am going to repeat that, since it is essentially the crux of the entire issue: changed consumer expectations.
Reread that, breathe it in, take it to heart, because consumer expectations are the soul of the market. However much we may love our books, the print media are not the beleaguered Rebel Alliance, and the internet and Apple are not the evil Galactic Empire. It’s not a David and Goliath struggle here. Just like Sony, Geffen, and BMG, publishing houses are massive corporations with bottom lines and products to sell. The real Rebel Alliance is made up of consumers, bloggers, independent authors, self-publishers, and content creators of all types. Basically, people who write stuff and people who want to read stuff. To follow the analogy even further along this line, the internet is the Force, in that it “surrounds us and penetrates us; it binds the galaxy together” (in the immortal words of Obi-Wan Kenobi).
The most important effect the internet has had on the publishing industry is that it has changed consumer expectations of what media should cost, how easy it should be to access, the scope and variety of options that should be offered, and the level of control the consumer should have over purchasing options. The immediate availability of every type of media online, the relative difficulty of the acquisition and consumption of printed media, as compared to things like songs or television shows, and the initial resistance of publishers and authors to offer their books digitally created an uncertain place for book publishers in the market. This point was proved when book giant Borders filed for bankruptcy and shut down its stores.
Since newspapers and book publishers deal not only in information, but also in a physical product, they are experiencing some difficulties producing and selling their products in tandem with their digital content. If their digital content is offered for free, it cannot replace the revenue from sales of the physical product. By the same reasoning, the physical product cannot fund the free digital content if it is already losing money. Since publishing companies have been forced to cut budgets everywhere they can, downsize staff and reduce page counts, it seems impossible for them to retain the readership they so desperately need. The mainstay of the newspaper industry is in advertising dollars, but the book industry only sells content. So, how will the book industry harness the power of the Force and make money in the new digital universe?
Again, the music industry is a good place to look. According to a recent article on electronicbook-readers.com, the Napster/iTunes effect on the music industry is a leading indicator of what is possible for the future of book publishing. “CD sales have declined thirty percent in the last five years and digital downloads have not completely made up that gap created by the technology.” They say; however, “…different means of consumer consumption and distribution are responsible for the economic decline of the music industry.” They explain that it is the choice that consumers now have of listening to music before they purchase it, along with a sharp decrease in consumer perception of the value of digital content that are responsible for the decline in sales.
There are multiple giants for publishing houses, magazines, and other print media to slay if they don’t want to follow Borders into the tar pits of history. The largest of these, as with the music industry, are the challenges posed by digital distribution. The music industry has undergone massive change in response to the consumer-driven popularity of digital download sites. While this change was painful at first, most of those resisting it were at the top of the industry food chain making millions of dollars on overpriced, overexposed, overprocessed, records anyway, and the market has enthusiastically ignored their plight. As a result, the industry has been forced to evolve. With the rise of iTunes and pay-as-you-listen consumer sites like Pandora, the music industry is alive and well, and poised to take on any challenges the new market presents. But how will the publishing industry fare?
Stay tuned for next week’s blog, the Dark Side of the Force (digital piracy)/A New Hope (the publishing market evolves); and the week after that for the Return of the Jedi (an ebook pricing strategy that works).
Image by Declan Fleming. Used with permission under Creative Commons License: Attribution-NonCommercial 2.0 Generic.

The Battle For a Digital Pricing Model That Works. Part One: Pub Wars!

By Rebekah Hunt
In March of 2011, Jon Bon Jovi famously accused Steve Jobs of being “personally responsible for killing the music business,” in an interview with the London based Sunday Times. “Kids today,” the aging rocker said (probably after chasing some off his lawn), “have missed the whole experience of… taking your allowance money and making a decision based on the jacket, not knowing what the record sounded like, and looking at a couple of still pictures and imagining it.”
In his defense, he did acknowledge that this made him sound like an old man, but the self-awareness stopped there. Mr. Jovi failed to grasp the crux of the issue, which is the other part of the experience kids these days are missing: the experience of getting price-gouged by a greedy record company for a record that included a bunch of filler, propped up by one or two listenable songs and a ruthlessly promoted single, only to feel let down and cheated after being forced to buy it “not knowing what the record sounded like” and then being stuck with it. And it is this experience, not Steve Jobs, that really killed the music industry.
What does this have to do with the publishing industry? Everything. One of my major motivating interests in the publishing industry, specifically at this point in history, is the monumental evolution the market is undergoing. In the wake of the Napster/iTunes revolution and its palpable effects on the music industry, current developments in software, hardware, and online accessibility; other industries are quickly moving to follow suit.
Despite criticism of its bite-sized, carte-blanche style of selling media to consumers, iTunes has set the bar for consumer expectations of the availability and ease of consumption of media. Sites like Netflix and Hulu are leading the way in on-demand digital sales of television and films, even partially contributing to the Writers’ Guild strike of 2007-08 over residual payments based upon digital media downloads and online streaming content. The one industry that appears to be foundering in the current market’s sea change is the publishing industry.
This brings me to the ultimate question for the publishing industry: how is the publishing industry going to evolve to stay relevant in the current economic and technological climate? The obvious answer for now seems to be the migration of the written word away from paper and toward digital media, but the struggle over pricing and distribution of books and other publications in digital formats has been confusing at best, chaotic at worst. In order to find a solution, we first need to isolate the problem by examining the traditional publishing model and trying to assess the major factors contributing to its decline.
Stay tuned for next week’s blog, the Fall of the Old Republic (the decline of the publishing industry); and the week after that, for the Dark Side of the Force (digital piracy) and A New Hope (the publishing market evolves); and the week after that for the Return of the Jedi (an ebook pricing strategy that works).