What’s the right price for ebooks? (updated)

It's probably not 99 cents

Author Chuck Windig, GigaOm’s Mathew Ingram, and TechDirt’s Mike Masnick all took on the question of ebook pricing recently, arguing that production costs (you know, minor details like advances, editors, etc.) don’t or shouldn’t factor into the end price.

Ingram writes that “It doesn’t matter what e-books cost to make,” and Masnick follows with “Nobody Cares About the Fixed Costs Of Your Book.”

But nobody cares about the fixed cost of your car, either. And yet, it matters, in theory as well as in practice.


But as author Chuck Wendig notes, what e-books cost to manufacture or distribute is irrelevant to everyone but the publishers themselves. All that matters is what book consumers are willing to pay for an e-book — and the same principle applies for any form of digital content.

In fact, an ebook’s production cost is directly related to the decision to make it at all. Just as buyers may decide that a $12.99 ebook is too dear, sellers may decide that any price below that level doesn’t justify the cost of writing, editing, and publishing it.

If demand were all that mattered—reader heaven—ebooks would cost 99 cents and you could impulse-buy them like an iTunes song. In book-business heaven, ebooks could charge some big number, and readers would have no choice but to pay up.

In reality, as in theory, the market for books is only so big—we only have so much time—so a 99-cent price point might move a lot of units but not enough to justify the cost of production. Obviously, a $50 price point would crush sales and also bring in much less revenue overall.

With either, the ultimate outcome would be a hollowing out of the books economy. With far less prospect for making back their upfront costs, publishers would only bankroll sure winners, and even those would make less money than before. Writers would have less incentive and less ability to write books. Authors who are capable of producing quality books would do something else.

The fixed-costs-don’t-matter argument hinges on your conception of the nature of the product.

Wendig likens a book to fast food:

An e-book is a digital good. Ephemeral and intangible. Sometimes we don’t even have access to the e-book itself in the form of a file — in the case of Amazon, we’re just “renting” the e-book the same way you rent Taco Bell food. You bought it. It’s inside your device. But if Amazon decides you don’t need it anymore, one snap of the wizard’s fingers and the e-books are poof, gone, siphoned from your reader like gas from a gas-tank. E-books have no supply — if I buy one, it doesn’t reduce how many remain, because theoretically infinite copies remain. No cost to reprint. No cost to remake. It just… sits out there, attempting to be the very embodiment of the Long Tail.

This is what the audience sees and believes.

It matters little what the e-book actually costs.

It only matters what the audience thinks they should cost.

If you want to buy fast food, though, you have many options. If you want to buy The Big Short, there’s only one.

This is a fundamental disagreement over the value of cultural production, in the end. We think it’s intrinsically valuable and believe cultural consumers do, too.

Let’s take another example, this time in software:

If I want to buy a copy of Final Cut Pro X, for instance, Apple will sell it to me digitally through the Mac App Store for $299. The marginal cost of that copy—what Apple pays to shoot the 1s and 0s over the intertubes—is almost nothing. Apple charges $299 because it believes that’s the sweet spot in the market and, presumably, because video editors actually buy it at that price. If you don’t like it, you can go buy Adobe Premiere or Avid’s Media Composer, steal the software and live with the potential consequences (and your conscience), or do without.

If “the pricing on the individual item is entirely about the marginal costs,” as Masnick says, Final Cut would cost 99 cents. But it doesn’t, and it sells.

The marginal-cost-is-all argument also fails to take into account copyright law, which essentially grants each new work a sort of miniature monopoly. If I write a book about something, you can’t republish it unless I give the okay, or unless it’s 70 years after I kick the bucket and the copyright expires. You can argue about whether copyrights are too long or too restrictive, but we grant them so creators and investors do the creating and investing they otherwise would do much less of if anyone could profit off their work. Just because a product is digital doesn’t mean it’s infinitely abundant—as long as the law is enforced.

That doesn’t mean it’s right for big publishers to get together with Apple to fix prices in a market, if it turns out that’s what happened. But it’s worth noting, as I’ve written, that they were responding to Amazon’s distortion of the ebooks market via its willingness to use predatory pricing to preserve its ebooks monopoly. Rather than ham-handedly setting prices at $12.99 and $14.99 (and, importantly, making less money than they did from Amazon’s system), the book industry should have used the agency model to individually price books at their own price points and let readers’ purchases help them decide where to end up.

At base, copyright holders have the right to ask what they want to get for their work (which is why they were so concerned about Amazon selling ebooks at a loss). If they set the price too high, nobody will buy the book and they will lose money. If they set the price too low, lots of people might buy it, but they will still lose money.

Marginal costs in the ebooks industry aren’t even really about what it costs to produce a copy. In ebooks and other digital media they’re actually about what it costs to produce the next entirely new ebook, not what it costs to send out one more copy of Harry Potter. The marginal cost to an airline, for example, of putting one more person on a plane is almost nothing, but it would go broke (or broker) if it did that. The real marginal cost is what it takes to get the next plane in the air, not the next passenger.

If readers don’t want to pay $12.99 or $14.99 for an ebook, they won’t. And the book industry will have to lower its prices. Until then, they can buy all the 99-cent ebooks they want on Amazon.

UPDATE: I should say that Masnick wrote this about why fixed costs matter: “That’s not to say that the fixed costs aren’t important — they are — but they don’t factor into the pricing decision, they factor into the investment decision.”

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum. Tags: , , , ,