Windowing: Why Big Publishers Can’t Jump On Board the Ebook Train
I really should be writing, but the misinformation and outright lies being tossed around the Interwebz drives me to distraction.
Hachette CEO Michael Pietsch responded in Digital Book World to all those who answered Amazon’s email plea and sent him a message this weekend. He said several questionable things, but I want to focus on the last bullet point in his letter:
• The invention of mass-market paperbacks was great for all because it was not intended to replace hardbacks but to create a new format available later, at a lower price.
As a publisher, we work to bring a variety of great books to readers, in a variety of formats and prices. We know by experience that there is not one appropriate price for all ebooks, and that all ebooks do not belong in the same $9.99 box. Unlike retailers, publishers invest heavily in individual books, often for years, before we see any revenue. We invest in advances against royalties, editing, design, production, marketing, warehousing, shipping, piracy protection, and more. We recoup these costs from sales of all the versions of the book that we publish—hardcover, paperback, large print, audio, and ebook. While ebooks do not have the $2-$3 costs of manufacturing, warehousing, and shipping that print books have, their selling price carries a share of all our investments in the book.
This bit: “create a new format available later, at a lower price” is referred to as windowing and it’s something readers have railed against since mass-market paperbacks were first introduced. We all know the drill. Our favorite author writes a new book. First, it gets released in hard back. Then, sometimes more than a year later, it finally is released in paperback. Why do the publishers do this? Profit.
Let’s look at a typical bestseller hardback new release. I am going to use generic, made-up numbers for this example. There are always exceptions to every rule. Most new hardbacks these days are priced at about $28. Publishers sell them to distributers/retailers (like Amazon, Barnes & Noble, and Ingram) at a 50% discount, meaning the publisher gets $14 for the book. Mr. Pietsch states above that print books have production costs of $2-$3 per book attached to them, in addition to the fixed costs he states, such as editing, design, etc. (We’ll ignore the fact that he uses warehousing and shipping twice in his argument) Those fixed costs, in normal accounting procedures, would get amortized over the projected sales of the book. For argument’s sake, I’m going to use a figure of $6 per book to cover those “investment” costs — and I think I’m being generous here. Remember that the author’s royalty is baked within that figure because the publisher has paid the author an advance already, so about $4.20 of that $6 is being used to pay down that advance. That leaves $1.80 for the other costs. If the book is expected to sell 100,000 copies, that’s $180,000 for editing, design, marketing, blah, blah, blah.
So, we have a final “cost” of the hardback book at roughly $9 and the publisher gets $14. Pretty good deal. Here’s the problem though. The paperback version of the book retails for around $10 these days. Meaning that the publisher gets about $5. That figure doesn’t look so good against the $9 cost we established earlier, yet Mr. Pietsch claims they recoup those fixed costs he mentions from “sales of all the versions of the book that we publish—hardcover, paperback, large print, audio, and ebook.” Even if we assume the production cost of a paperback is a little less than the hardback, it still doesn’t make financial sense. What are we missing?
Windowing. Because the book is only released in hardback initially, the publisher guarantees it sees that nice number for the first several months to a year of the book’s existence. Contrary to what Mr. Pietsch is claiming, the publishers don’t amortize those fixed costs over all formats — at least not equally. They make their money with that initial hardback release.
Now, ebooks enter the picture. People expect to have access to the ebook version of a new release at the same time as the hardback. To make that happen and still get the profits they want from a new release, publishers have to jack up the price of the ebook beyond reason. Let’s look at the numbers. We had a figure of $9 for production/fixed costs of our hypothetical new book, but we can take out that $3 needed for printing and distributing the paper version, so we’re down to the $6 fixed cost figure. Amazon would like to sell ebooks for no more than $10 ($9.99), of which, they take 30% instead of the 50% for paper copies. That leaves $7 for the publisher. Profitable, but nowhere near the $9 vs $14 we saw with the hardback. Ah! But if the publisher says, “Let’s charge $15 ($14.99) for the ebook,” then we have something. Now, they are getting about $10.50 from Amazon for that book vs. the $6 cost, which is nearly the same as the hardback profit margin. (This doesn’t take into account the lower author royalty dollar-wise for the ebook, which amounts to about $2.65 instead of the $4.20 we showed earlier, meaning the publisher actually does better on the $14.99 ebook than the hardback.)
With me so far? Everything sounds like it works out just fine for the publisher, right? Except for one thing: people get really pissed off at paying $14.99 for an ebook.
Amazon knows this. People leave nasty one-star reviews by the droves whenever a book gets priced over $10. People also get pissed off when publishers have tried to window ebooks — in other words, not release them at the same time as the hardback. The publishers can’t stomach the $9.99 price point because their business model falls to pieces.
Guess what? It’s time for a new business model. Ebooks aren’t going away and neither is the average reader’s desire to not pay more than $9.99 for it. Until the big publishers grasp this concept, they are going to continue to butt heads with Amazon.