How Long Will Publishers Be Able to Ride the E-Book Profit Wave?

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Sales are flat and margins are up at major U.S. book publishers, but how long can it last?

In the past two weeks, both Penguin and Simon & Schuster have reported their 2011 results with nearly no change in overall revenue. At the same time, profits are up at both companies.

There are many things that could account for that – operational savings like moving to a more efficient technology system or a cheaper office space, or realized cost savings from a restructuring several years ago, for instance. But I think it’s because of e-books.

As e-books sales rise by double and triple digit percentages year-over-year, and print sales slowly decline, overall revenues remain relatively flat. But because e-books give publishers a bigger profit margin, the flat revenue comes with an increase in profits.

Let’s engage in a thought experiment. Say in 2010 Jeremy’s Fake Book Co. sold $90 of print books and $10 of e-books for total sales of $100. Profit from the print sales was $9 and profit from the e-book sales was $5 for total profit of $14. In 2011, Jeremy’s Fake Book Co. sold $80 of print books and $20 of e-books for total sales of $100. (E-book sales double, print declines…sound familiar?) The revenue is the same vs. 2010, but if we use the same margins of profit, we get $18 total — $8 from “p” and $10 from “e.”

These numbers may not perfectly reflect the reality of a real publishing company, but they illustrate what I think is going on in book publishing right now.

The issues for many book publishers in 2012 will be:

— Maintaining a reasonable rate of decline for print sales and profits

— Maintaining high margins and growth on e-books to support overall company growth

With shelf-space continuing its decline, the first will be a tall order for some publishers. The second issue may be just as tough.

“Sales are down, margins are up. And that will last as long as they [publishing companies] can continue to pay authors the royalties they’re paying them [for e-books] and sell the books at the terms they’re selling them on,” said Mike Shatzkin, publishing consultant (and partner on the Digital Book World Conference + Expo).

As for pricing, publishers on the agency model (where they set the price at retailers like Amazon and Barnes & Noble) will be able to set their own prices until their individual contracts with the retailers are up. Those selling wholesale also have agreements in place that should keep their margins steady for a while.

But what about costs, specifically, royalties?

According to Shatzkin, the most interested audiences for these announcements in which e-book profit-margin shines are Amazon and Barnes & Noble. They may say to themselves, “if publishers are making such good margins on e-books, we want more of that profit.”

Booksellers may already be going after that additional profit. Rumors are that Amazon has already started renegotiating contracts with publishers. And last week, reportedly due to a stalled contract negotiation, Amazon stopped selling e-books distributed by the Independent Publishers Group, a large, Chicago-based book distributor for smaller publishers.

Shatzkin has a solution to this problem for publishers: Pay authors higher royalties on e-books.

The going rate on e-book royalties is about 25%. Shatzkin suggested to publishers in a blog post in December that they should pay even higher royalties on e-books to authors.

“It would stamp them as more author-friendly and it would show retailers that there won’t be as much margin in the future,” he said to me today on the phone.

A major book publisher should even go so far as to make a public announcement about higher e-book royalties, Shatzkin suggested, getting ahead of the game.

Royalties are already creeping up, said Shatzkin. The reason that it has not made it into the news yet is that agents who negotiate more favorable e-book royalties for their authors often sign a non-disclosure agreement about the deal and can’t share the details with the press.

In December, we at Digital Book World gathered the predictions of many experts in the book publishing industry for what we would see in 2012. One of the predictions was that the standard e-book royalty from a major publishing house would rise, maybe even to 50%, up from 25%.

The forces that could push that number up may already be in play.

Jeremy Greenfield

About Jeremy Greenfield

Jeremy Greenfield is the editorial director of Digital Book World. Opinions presented here are his own. Read more of his work here.

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2 thoughts on “How Long Will Publishers Be Able to Ride the E-Book Profit Wave?

  1. The reality could be that authors walk away from publishers if they see a larger and larger percentage of their royalty statements reflecting eBook sales at such low royalty rates. 25% of list is pretty low overall.
    Another issue for publishers is Agency Pricing. Pricing an eBook higher than a mass market paperback isn’t sitting well with readers.
    What will happen is that eBooks will be the new mass market paperback, but cost a lot less to produce. The question is: where is that extra money going?

  2. Royalties are already creeping up, said Shatzkin. The reason that it has not made it into the news yet is that agents who negotiate more favorable e-book royalties for their authors often sign a non-disclosure agreement about the deal and can’t share the details with the press.

    In December, we at Digital Book World gathered the predictions of many experts in the book publishing industry for what we would see in 2012. One of the predictions was that the standard e-book royalty from a major publishing house would rise, maybe even to 50%, up from 25%.
    ******

    Very interesting, it makes sense that in some cases it’s worth a publisher’s time to negotiate a better rate then risk losing revenue a solid author can bring in with back list and continuing list digital rights. I can’t imagine the large publishers will float 50% though, certainly not across the board. They’re a heavy machine that requires a lot of fuel to keep going. Bob makes the point that authors can see the gap between what they get and what the publishers get vs. cost of production and that drives some to strike out alone. Unless the machine streamlines, it will still require a lot of scratch to support bloated overhead and operations. And if the distributors like Amazon are pushing for higher cuts, the author will take the hit. Not that they should, but bottom line is that the major publishing industry is running on a gas light paradigm and it’s going to take a shift proportionate of an exploding planet to move them into a model that is efficient, cost effective, AND author/reader friendly. We have a long way to go before that paradigm shift can happen, though I’d say that it starts with the leverage of the evolving digital models. But way more is needed to retool the machine, and I’d suggest nothing short of all out catastrophe will be sufficient motivation for the entrenched system to change in a global and meaningful manner.

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