The Positive Economics of Ebook Bundling and Amazon’s MatchBook
Ebook bundling is not a new concept. Offering readers a low cost or even free ebook when they purchase a print book has been discussed widely in the book business ever since the advent of ebooks. At least a few independent publishers have experimented with bundling, albeit with modest or little success.
That is doubtless because attempts to sell bundles directly to consumers run up against the walled-garden approach of the major players, Amazon, Nook, Apple and, to a lesser extent, Kobo and Sony.
Whether by choice or because of the way ebooks are tied to specific devices, readers almost always affiliate with retailers to buy ebooks. Of course the retailers themselves have gone to great lengths to make it incredibly easy for ebook buyers to live only within their ecosystems. Because of this “one-click” simplicity of ebook buying, many if not most readers have no clue how to “side-load” an ebook onto their devices that they did not buy directly from their vendor.
Amazon has been incredibly adept at making it easy to buy ebooks through Kindle, to the point that it is highly unlikely any publisher could successfully bundle an ebook with a print book purchase destined for a Kindle reader without the e-tailer’s help. And since Kindle is thought to have somewhere in the neighborhood of 60% of the U.S. ebook market, that is significant.
I have heard anecdotally that individual publishers have tried for years to get Amazon to offer some form of ebook bundling, but that they have been turned away, with Amazon saying that the logistics would be too difficult for them to implement.
Amazon’s MatchBook Program
Amazon has now launched ebook bundling in a particularly brilliant way — if a book is in the MatchBook bundling program, and a reader bought that book in print form anytime in the last 18 years since Amazon started doing business, she can purchase the ebook version of that print book for as much as $2.99 or as little as free, depending on the publisher’s offer.
Amazon launched this program with “only” 100,000 titles, still a meaningful number of titles on offer. HarperCollins is already on board, and if the program gets traction with customers, other publishers will sign on for their back-list titles.
Why MatchBook is great for Publishers and Authors
Some publishers and observers have already criticized MatchBook, suggesting that this move will devalue ebooks, or that it will decrease publisher revenue. And I have heard that some agents will likely counsel their authors not to agree to this program (though I don’t know how many authors have the contractual right to disapprove their publishers selling an ebook at a reduced price bundled with a print book sale).
I don’t agree with the critics of ebook bundling. I think will be beneficial both for the short-term and the long-term future of publishing.
Some publishers and others in the trade have worried that a $2.99 price for an ebook devalues the perceived value of its content. But there are already thousands of ebooks in the market selling at $2.99 or less, and it is very likely that those books already helped create a perception that ebooks can be had at low prices. And, as this essay will later argue, it is less expensive for a publisher to produce an ebook bundled with a print book, so why not pass that savings on to the consumer, whose support we need to stay in business?
Further, the low priced ebook sold as a bundle with a print book is a completely different value proposition for the consumer. There is a longstanding tradition in consumer marketing of bundling related products at lower prices. We instinctively understand that we are getting a deal for the combined purchase we could not get otherwise. And if publishers maintain current pricing, consumers are getting a deal they will fully understand in the bundling offer.
The proposition that when you buy a print book you are able buy the digital version at a low price makes sense. That does not devalue content; in fact this transaction increases revenue for the retailer, the publisher and the author and provides value to the consumer. To argue otherwise you must pre-suppose that readers mostly buy both print and ebooks separately and pay twice for the privilege.
Except for the really big best-sellers, where consumers actually buy both print and ebook enough of the time to have been noticed by publishers, that is not how readers operate. Most of the time, and especially for middle- and back-list books, consumers buy either a print or an ebook version of a title, not both.
Selling the bundled ebook as a low-cost add on makes customers happy and at the same time brings additional revenue into the publishing value chain.
Personally, I would be thrilled to own a print book and its ebook version at the same time, and would be perfectly happy to pay a small premium for that benefit. If I don’t want both versions, I don’t have to buy both. I can continue to purchase either version at any time, whichever pleases me, and importantly, if I do, I will pay the publisher fairly.
(Additionally, with MatchBook, the opportunity to acquire ebook versions of books I bought years ago — books that I may not still have in my possession — is a boon for both me and for the books’ publishers and authors. These are ebooks I would never have purchased otherwise at full retail prices.)
Bundling appears to be additive in every way in almost every instance.
During the last five-to-ten years, many large publishers have experienced an overall increase in profit margin through digital publishing, while at the same time seeing overall revenue shrink. Ebook sales do generate fewer revenue dollars than print sales. Bundling has the potential to restore some of that lost revenue to print publishers with extensive back-lists.
The Economics of Ebook Bundling
Here is why ebook bundling is actually good for print publishers.
Publishers typically pay about between 15% and 25% of cover price for editorial and print costs. Royalties are additional and average anywhere from 4% to 15% of cover price, depending on format and specific author contracts. Publishers recoup in the neighborhood of 35% of cover price from sales (sometimes less, sometimes more, depending on level of sales and their sales terms with retailers). Marketing is another part of publisher cost, ranging from 5% to as much as 10% of cover price per book, again depending on format and ambition.
Let’s say a paperback original sells for $18.00 and its publisher’s net after royalties is probably around $6.00, out of which comes print and plant costs of $3.40, so a gross profit of about $2.60 — not including cost of returns, by the way, so reduce that by about $.60 per unit for a true unit revenue if about $2.00 a book.*
|Paperback sold alone|
|Publisher Gross Revenue||$7.65|
|Less Cost of Goods*||$3.60|
|Less Author Royalty||$1.44|
|Less cost of returns||$0.60|
Ebooks, when produced as an integral part of the print book publishing process, cost very little on a per unit basis. The publisher has already paid for the editorial and cover design work as part of the print book production. The direct cost of ebook conversion for a reflowable book can be as little as $200 for smaller publishers, and is significantly less for larger publishers, so for the average book it’s almost an inconsequential cost. Significantly, digital distribution is much less expensive that print book distribution, with no physical warehousing or freight (both inbound and outbound freight is paid by the publisher) and there is effectively no cost of returns. In the P&L (profit and loss statement) for ebooks, COGS (cost of goods sold) is very low indeed.
So while ebook retail prices are generally far lower than print book prices, their production cost is marginal, and the overall profit margins are much higher than for print (when ebooks are produced alongside print books). Royalties on ebooks are usually 25% of publisher net.
So let’s say that the average retail price of an ebook is about $8.00 (less than half the price of an average paperback). Retailers get half of that. Distribution costs 10% (or less) of the wholesale price, so publishers get back $3.60 per unit sold and pay the author $0.90, and let’s deduct $0.15 a book for cost of goods (ebook specific production cost divided by average unit sales), netting $2.55 per book.
|Ebook sold alone|
|Publisher gross revenue||$3.60|
|Less cost of goods||$0.15|
|Less Author Royalty||$0.90|
This amount is higher than publishers net on paperbacks and not a whole lot less than a publisher will make on hardcovers (for most trade books today, hardcovers are not the primary edition anyway).
The Economics of Bundling
Let’s presume a publisher sells the print book on the model above, but now bundled with an ebook sold at an additional $2.99. Publisher net revenue on the paperback is $2.01 as noted above. Now the publisher gets to add revenue from the bundled ebook generated as follows: $2.99 retail price for the bundled ebook will provide a publisher with $0.86 additional revenue.
|Publisher gross revenue||$1.35|
|Less cost of goods sold||$0.15|
|Less Author Royalty||$0.34|
The economics of bundling work in publishers’ favor. Using the examples above (which are conservatively stated) if some readers who would have bought the print book only buy the bundle, publishers make another $0.86 per bundle. Other readers who would have bought the ebook only and who then migrate to the bundle sale give the publisher an additional $0.35 per bundle. So if only 10% of readers (half ebook buyers and half print book buyers) take the bundling offer, publishers make an average of $0.60 additional profit per bundle sold.
For many publishers, the effects will be to drive significant revenue and margin increases. For instance, a book that sells 20,000 paperback copies at $18, nets about $40,000 for the publisher (depending on a variety of factors). If 10% of buyers also buy the ebook at $2.99, that would increase profits by at least $1,720, an increase of 4.3%.
Publishers and Authors Benefit from Bundling
We can presume that most current ebook buyers will not suddenly stop buying ebooks and switch to buying print-with-ebook bundles. Publishers will continue to sell roughly the same quantity of unbundled ebooks at their current price points, because the only way to get a “cheap” ebook is by buying the more expensive paperback or hardcover first.
It is very likely that ebook bundle prices will initially lead to customers buying significant quantities of inexpensive ebook versions of print books they have purchased in the past, resulting in a short term boon for publishers and authors alike.
In the longer term, any migration of consumers from buying ebooks only or print books only to the MatchBook bundle will increase revenue to the publisher and the author.
The only way a publisher can have net unit revenue that is less for an ebook than for a print book is if it does not publish a print version in the first place (because editorial cost is recouped against lower unit sales revenue) and of course then bundling is impossible anyway. For those have been worrying that publishers would stop publishing print book versions of their favorite books, bundling looks like a good way to keep print viable for a very long time. It may even offset some of the advantages digital-only publishers and self-publishers have experienced in recent years and, ironically, return those advantages to traditional print publishers, which, through bundling, will be able to offer unique value propositions.
Of course, ebook bundling clearly has the effect of strengthening the position of retailers against publishers trying to sell directly to their consumers. That may not be to the liking of at least some publishers who would like to have their fortunes untethered from those of retailers. But there is a fair economic trade in this dynamic, whereby publishers get to make more money in return for retailers becoming stronger. That might not be a bad thing for publishers. Publishers who disagree will simply opt out of the bundling program.
It seems pretty likely that Barnes & Noble and maybe the independent booksellers will have to jump on board the ebook bundling bandwagon sooner than later. What’s not to like about this for consumers? And that can only be good for publishers as well. Ebook bundling looks like a win for readers, retailers and publishers alike.
However, publishers do not always share business outlooks or models. Bundling the MatchBook way is profoundly conservative, supporting the primacy of the printed book over ebook. It also advantages retailers like Amazon and Barnes & Noble, which sell both print and ebook versions of the same book, at the expense of digital-only competitors like Apple and Kobo. Publishers may well fear the devaluation of their content, but perhaps even more dangerous is the growing primacy of Amazon, and thus some will forego any windfalls of ebook bundling in order to maintain control over pricing and sales strategy as well as supporting a vibrant ebook marketplace.
And then again, if MatchBook does not attract more of the larger publishers beyond HarperCollins, perhaps consumers will lose interest, and bundling will go the way of the signed hardcover bound limited edition of literary works.
* Some notes on business models illustrated here:
Because publisher accounting for overheads and for the additional work that digital publishing introduces to the publishing workflow varies among publishers, this analysis is limited primarily to unit cost and therefore will not be fully accurate representations for all publishers, particularly for those publishers large enough to manage ebook conversion and distribution in-house. Additionally, the percentages of ebooks to print books sold per title, especially for frontlist books, will significantly affect cost modeling.
Publisher costs are stated conservatively based on averages for many publishers and do not represent the actual costs of any specific publisher
Publisher costs, revenues and profits are very much subject to variation.
Publisher cost of goods for print books varies by length, complexity, number of books produced and publisher buying power.
Distribution costs will be higher for smaller publishers and lower for larger publishers.
*Includes PPB and plant costs