Are publishers making windfall profits from ebooks? The recent round of financial results coming from major book publishers suggests they are but they are staying tight-lipped.
A recent case was Random House which posted a solid result in the face of tough trading conditions. Its parent company Bertelsman was clearly pleased with its book division saying, “at Random House the U.S. business and the digital operations performed especially well.” No more detail was given but this result comes as the company’s core US trade book market has seen upheaval and double digit declines in the reporting period.
Random House is following a trend here among major publishers who seem to be weathering the storm in the US book trade with few visible signs of pain. The expected pain—lay-offs, closures, major reorganisations—will be familiar to anyone who has lived through the wrenching changes that happen when companies with high fixed costs have to adjust to sudden, large and long term decline in their core business.
But with book publishers we’re not seeing this happen, at least publicly. My guess is that the companies have a profit buffer from very healthy ebook margins on what has become a big chunk of revenue, especially in the US market. This is buying time for a more gentle reorganisation of their businesses.
We’re probably seeing a situation today where a lot of income is being earned from backlist titles which will be very profitable once their modest digital conversion costs are recovered. And with frontlist, we might be seeing high ebook profit margins offsetting a lot of the impact of lower p-book sales as ebooks are bought in their place.
This points to the possibility book publishers might have a “softer landing” than their media peers as their market shifts to digital. So far, they’ve maintained relatively high ebook prices and relatively low losses to piracy compared to the situation that faced music or the challenges that still confront the advertising-driven newspaper and magazine sectors.
Authors will no doubt wonder to what extent they are funding publishers through the standard 20-25% royalty deals. Sensitivity to this issue probably explains why publishers are being so tight-lipped about their impressive success. There are real risks and upfront costs that make this royalty level justifiable for new titles—including cross-subsidies for increasingly marginal, but still important, print editions. But authors will justifiably want publishers to get more efficient and pass on some digital gains to the content creators.
Another key place for these profits to be invested is in promotional support. Not just the free sort which publishers tap so well with their sophisticated publicity operations, but paid advertising. Publishers have to start replacing a lot of the exposure that bricks and mortar booksellers delivered by upping their advertising and promotion budgets considerably. This will also help publishers maintain higher price points in the face of increasing competition from the 99 cent self-publishers that are beginning to dominate bestseller charts.
Hopefully, despite the financial buffer from ebook profits, publishers are quietly and determinedly beginning to restructure for a leaner future rather than using this short term windfall to delay making changes. Keeping those fat profits will provide the opening for new digital-only players, something that will ultimately cost the traditional publishers dearly.