Good results point to windfall ebook profits for publishers

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.

Comments (5)

  1. Jennie

    A great read. I’m personally quite excited for some large online-only publishing houses to really make some ground, I think it’ll be fascinating to see how it shakes up the industry. I also think that it will open up access for new authors, something that we need here in Australia quite desperately.

  2. Caleb

    I found you by googling “ebooks opening up access for writers.” Jennie’s comment was what triggered the result as it turns out. I find it revealing that hardly anyone within the existing publishing industry seems to think their push to raise prices over the past 30 years did not lead to fewer writers being published and fewer people paying high prices for books. I have been reading submissions at Publerati (my start-up) and many are coming from writers once published by Penguin and others who cannot get published anymore. And if existing publishers with all their overheads are only going to view ebooks as another extension of their print author agreements, then prices will continue to be too high and the central problem will go unsolved. Publishing consolidation beginning in the 1980s closed down expression and the Internet solved that problem for information. But the problem still exists for books and I am skeptical the people who have worked in publishing for decades will be the ones who solve the problem.

  3. Martin Taylor (Post author)

    @Caleb, good points here. The pricing issue is going to play out all over again with digital and one thing we’re already seeing is that, right from first release, we’ve got the opportunity for low prices (what in the past would have only been possible in the remainder bins of bookshops or the dusty secondhand bookshops). But we also have flexibility at the top end and I think the efforts of the big publishers to keep up the price of (some) ebooks will be an important contribution to writers as well as publishers’ future success.

    One cost that isn’t factored into many ebooks today is a substantial promotion cost. In the past, retail shelf space has been the primary promotion (paid for by a 40-50% margin). Online, I firmly believe publishers will have to allocate substantial resources to paid advertising and promotion, not just today’s free publicity approach. Books are mostly one-off projects so it’s likely that some promo budgets will need to be 20-30% or more of sales, several times what they are today. That’s the sort of investment they should be making to promote big sales for the books with big potential — and many self-publishers need to consider the same strategy to give their books a good start.

    What prompted me to write this piece was not so much that I’d like to see publishers making ebooks cheaper overall – there’s already a good range of price points – but that they should not use those extra “profits” to prop up their existing business model and delay the transition. I fully expect that we’ll continue to have bigger publishers whose reputations and expertise allow them to pick from the top commercial writers or commission works that need big advances and risk-taking. But what really excites me is better exposure that thousands and thousands more excellent writers and small and mid-tier publishers will get. It won’t make success easier but it will make it easier to get in the game. I expect we’ll see a new period of energy and diversity, and chance for the next generation of writers, publishers to emerge. And if we do our job right, more books will be read, partly because they’re cheaper but mostly just because they’ll be more good books, more easily acquired.

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