It doesn’t matter what e-books cost to make

Book publishers are trying hard to defend the pricing of e-books — perhaps in part because they’ve been accused by the Justice Department of rigging prices to keep them artificially high — by arguing that it costs a lot more than most people think to produce the electronic version of a book. 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.

Hearing the complaints of book buyers must be frustrating for publishers, because they actually have a pretty good case for why e-books cost what they do. Although many see the price of old-fashioned things like paper and printing presses and trucks to ship them as a big cost for printed books, publishers like Penguin point out that the main costs involve advance payments to authors, marketing and other support expenses — things that also apply to e-books. As Wendig puts it:

[P]roducing e-books costs more than you think. You’re paying for editors and cover design and, of course, for the book itself, and the mechanics of putting those things into a container are not the bulk of a book’s cost. Hence, e-books are always going to be close to their physical counterparts in cost.

But as the author also notes, consumers don’t really care what a publisher’s costs are, nor are they likely to pay more simply because a publisher argues that their content is really valuable. In the same way, movie-goers don’t really care how many millions of dollars a movie studio spent on their latest blockbuster — that has no bearing on whether they want to see it or not. It is the perceived value of the e-book that matters, not the cost — and there are some good reasons why e-book consumers might want to pay less.

Financial Times columnist John Gapper pointed out in a comment on Twitter that consumers often use justifications about how expensive content is to defend their right to download it without paying. And many e-book consumers probably do under-estimate what it costs to manufacture or distribute an e-book. At the same time, however, it doesn’t take an economist to figure out that publishers are determined not to let cheaper e-book prices (driven largely by Amazon) cannibalize their print business, which is why they cut the “agency pricing” deal with Apple that landed them in antitrust-lawsuit territory.

All that matters for readers is perceived value

Wendig also makes a good point about what you get when you “buy” an e-book versus a printed book. In many ways, what you are doing is renting the content rather than actually acquiring it, since you can’t sell it when you are finished with it, and most of the time you are prevented from even lending it to someone else to read — and in extreme cases, providers like Amazon can actually delete the book from your device remotely without your permission. So e-books may be convenient in ways that printed books aren’t, but they are also less functional.

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.

Even apart from that argument, however, there’s no realistic connection between what a content producer’s costs are and what people will pay. As journalism professor Jeff Jarvis noted some time ago, in reference to newspaper paywalls and subscription plans: “No one cares what you spent. Arguing that news costs a lot is irrelevant to the market.” And as David Pakman of NYC-based VC firm Venrock has pointed out, when it comes to digital goods, the marginal cost of producing another copy is effectively zero.

In the end, all that matters is what readers want to pay — and that isn’t always going to jibe with existing business models. During a panel discussion I was on recently, the editor-in-chief of a newspaper said he asked a businessman and loyal supporter of the paper what he would be willing to pay for a subscription plan, and the number was 50-percent lower than what the paper had planned to charge. Is that fair, given how much that content costs to produce? Perhaps not. But in the end, it doesn’t matter.

As I’ve argued before — including during a recent debate with my PaidContent colleague Laura Hazard Owen about the wisdom of agency pricing — I think publishers are shooting themselves in the foot by sticking rigidly to models that were appropriate for a different world, when “windowed” releases and regional restrictions made sense. There’s at least some evidence to show that if prices drop low enough, sales can climb by orders of magnitude. Why not allow e-book prices to float and then see where they end up?

Post and thumbnail images courtesy of Flickr users Aitor Calero and Marcus Hansson