Why Books Are a Crazy Business - part 2. Online.

In my last post, I wrote about how the current system of distribution and returns is nearly ruinous for publishers. For this reason, selling online through Amazon, Barnes & Noble, or other sites has become attractive even to small publishers who would otherwise prefer to support independent bookstores.

Amazon's business model means competing on price and selection as well as customer service.  As a result, it pays publishers only 45% of list price, so it's able to offer deep discounts to customers (far lower than what your local bookstore can offer).  On our $10 book, that means $4.50 from Amazon, minus 80 cents to the author, minus the $3.00 cost of printing the book, leaving a 70 cent profit minus whatever it costs to ship the books to Amazon.  The upside is that with Amazon there are virtually no returns.

Barnes & Noble's online store is a bit better for the publisher, because it will sometimes pay up to 60% of list price, leading to an extra $1.50 of profit.

How about e-books?  Suddenly the economics are different. There's no longer the cost of printing the book.  The cost of formatting books for a multitude of different Kindles, Nooks, Sony Readers and other platforms can be as low as $200.  (It will be higher for books with lots of graphics, changes in type, unusual design, etcetera, all of which are common in children's books and textbooks.)

Amazon and Barnes and Noble offer strong guidelines for what a publisher may charge for a book -- no more than 80% of the lowest print book price, and no less than $2.99.  If the publisher complies, Amazon pays 70% of list price, while Barnes and Noble pays 60%.  For our $10 book, discounted to $8 for e-book sales, that means a payment from the e-book retailer to the publisher of  $4.80 to $5.60.

But most publishers I've talked to recommend using a distributor for e-books as well as for print books.  For one thing, most distributors require that you use their e-book service along with their other services.  For another, they're good at formatting your books for every conceivable e-book platform, and they keep track of and handle money coming in from all the different e-book retailers, something that might otherwise require the publisher to have an employee dedicated to just that.  Distributors take 15-20% of the payment that would otherwise go to the publisher, bringing the publisher's take down to $3.84 to $4.76, minus the author's 64-cent share.

Clearly, this is much better. It's not surprising that e-books are now earning more than hardcover books overall, especially in the adult market.  But one catch is that e-books are still a very small part of the children's market.  For Lost in Lexicon, for example, my e-book sales have been no more that 1% of overall sales.  Boosting children's e-book sales may require building in a lot more apps and special features, which will mean more upfront costs and risk.

To break out of the small-volume, minuscule return pattern I've outlined in these two posts, promotion and publicity are a must.  Publishers hope authors will do a lot of that themselves, but they still spend money on advertising, brochures, e-blasts, and setting up interview opportunities.  Where does the money come from to pay for marketing?  As I've pointed out, books sold through distributors at low volume make almost nothing, and print books sold through online bookstores make little more.  It may fall to e-books to cover the marketing budget to break the tight-money cycle.

However, there may be other approaches.  More on that next time.