Monday, May 21, 2012

What are eBooks doing to the publishing industry?

We’ve now had a couple of quarters of earnings reports from the Big 6 publishers and some other large, publicly-held publishers, and two patterns have emerged:
  1. Overall revenues (sales) are down, but earnings (profits) are up.
  2. Print book sales are down, but eBook sales are up.
Overall revenues are down in part because consumers are substituting less-expensive eBooks for print books, and because total demand for books is declining (I’ll discuss that latter point in a moment.) Earnings are up because it’s less expensive to “manufacture” and distribute eBooks (the costs for editing and designing eBooks and print books are comparable and overlap to a great degree.) Folks are arguing all over the Internet as to whether or not eBooks are cheaper to produce than print books, and if it even matters. The fact is that eBooks are cheaper to produce, and it does matter. Here’s an abridged list of all the costs that print books require that eBooks don’t:
  • Printing
  • Binding
  • Shipping
  • Warehousing
  • Acceptance of returns
  • Inspection, warehousing and shipping of salable returns
  • Recycling or destruction of unsalable returns
Publisher margins are up because consumers are substituting lower-cost eBooks for higher-cost printed books, and heavy book buyers are buying more eBooks. However, printing and binding costs are extremely sensitive to quantity, so as eBooks comprise a bigger and bigger percentage of overall book sales, book manufacturing costs will start to rise. That’s one of the reasons why the Big 6 publishers have been raising prices for their eBooks—the increased profits they earn on eBooks are being used in part to subsidize the manufacturing cost of print books.

There will come a time when eBook profits won’t cover increases in print book manufacturing. At that point, publishers are going to have to make some very hard choices:
  • Raise print prices to reflect the full cost of manufacturing and risk an even faster decline in sales,
  • Adopt Print-on-Demand (POD) technologies, which allow manufacturers to control costs and minimize inventories but require dramatic changes in how books are manufactured, warehoused and distributed, or
  • Stop supplying printed books.
eBooks aren’t the only reason why demand for print books is declining. For many years, the average number of books read by each person has been dropping. The number started declining before eBooks became a major factor. The primary reason is that there are so many more ways for people to entertain and inform themselves. Consider that in the 1960s, when Random House co-founder Bennett Cerf was a regular panelist on the U.S. prime-time television game show “What’s My Line?”, there were three commercial television networks and, in most markets, three television stations. In most cities, you’d have one or two daily newspapers. Radio was an option, but it had been declining since the advent of television. There were movies, and of course there were books. Those were your choices.

Today, there are literally hundreds of thousands of additional media choices, most of which are available whenever and wherever you want via the Internet. There are video games and casual games available on game consoles, PCs, smartphones and tablets. Social media provides ways to get information and interact that weren’t thought possible in the 1960s. The result is that while the total media “pie” is getting bigger, each media choice is fighting for a smaller and smaller share of the pie.

Books haven’t fared well in the battle for attention, but eBooks may be slowing down the decline. Heavy book readers have been the most enthusiastic adopters of eBooks—they’re buying more titles, because the cost per title is less with eBooks than with print. Medium book readers’ use of eBooks is catching up with heavy readers, but they’re buying about the same number of eBooks as they did print titles. Light book readers are also light adopters of eBooks, and it’s unclear if they’ll buy or read any more eBooks than they do print books.

Even with eBooks, overall book sales will continue to decline—but they’re certainly not going to zero. In some countries, it’s entirely possible that eBooks will result in overall sales growth, as expensive, hard-to-distribute print books are replaced by less-expensive eBooks. (This is particularly true in markets such as India that still have primitive distribution infrastructures but fast-growing mobile phone availability.)

eBooks are changing publishers’ cost structures, redefining how print books are manufactured, reshaping channels of distribution and reeducating consumers about how much books “should cost.” However, they’re not changing the competitive environment in which publishers find themselves today, and at the end of the day, competition for consumers’ time and money may have far more impact on the publishing business than eBooks could ever hope to have.

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