Another Olde Media Industry puts head in the sand

eBooks should cost the same as paper books, says MacMillan CEO John Sargent - SAI:

John Sargent, CEO of publisher Macmillan, has taken out a full-page ad to explain why he is insisting that Amazon raise prices on its ebooks to $15 in some cases.

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First, to clarify what is happening here, you are already getting your money: You are selling ebooks to Amazon at whatever price you set ($10-$15), and Amazon is turning around and selling them at a loss, sometimes for $9.99. We're not against your charging what you want to for your books. We're against your telling Amazon what it has to charge for them.

Also, we don't want to pay $15 for ebooks, and we don't think we should have to. The marginal cost of an incremental ebook is pretty much zero. So why on earth should we pay $15 for it?

Its not quite so one sided as portrayed here - Amazon threatened at one stage to remove all MacMillan books, electronic and paper, from its listings. Amazon will now acquiesce, however - as the NYT notes. One wonders what it will do to the volumes sold?

Sigh - The Blodgett's views on economics always have to be handled with care (as many found out in dotcom days to their cost), but one does expect better of a physical media CEO who has observed this argument fail in music, journalism and now video. A little lesson in production microeconomics then. Consider the diagram above - a simplifies media value chain. There are 4 main cost buckets in producing a book:

(1) Content Creation - thats what it costs the creator (the author etc) to create he work
(2) Aggregation - the costs of agents, editors, advertising. legal fees etc etc
(3) Production - the cost of making the product, whether its digital or physical. However, physical production costs are significantly higher than
(4) Distribution - the costs of moving the product from producer to consumer - again, digits over the internet cost a fraction of the trucks, sheds and shops needed for books

Now, on to the cost of production.

(1) Cost of creation is the same, irrespective of the media
(2) Cost of aggregation is similar

So, assuming the market volume is the same. The costs are roughly the same, so the cost per unit will be similar. These are the costs in blue, above.

(3) Cost of Production - orders of magnitude lower
(4) Cost of Distribution - ditto

These are the red sections, and represent the difference in cost of production between a book and e-Book. I've drawn the 4 elements as roughly equal in size - in fact the cost of creation is fairly small, aggregation fairly large - but production and distribution are very material - at least 30% in nearly every case. That is a non trivial saving.

Now just to deal with Mr Blodgett quickly - the "marginal cost" is indeed near-zero once the full costs of the creation and aggregation have been met - but only when they have been met. That is true of both paper and e-books. Until then, they cost!

There is actually another cost, that of the consumer equipment required to read the media, but that comes after the cost to produce it and is not directly germane to the price. However, it is germane to the total cost of ownership. And shelling out several hundred dollars for an e-Reader is another factor arguing against equal pricing of book and e-book.

(Update - just reading some of the other articles, I think they are missing the fundamental point this shows - in other words there is a disruptive economic arbitrage between books and ebooks that will restructure the industry, whether it is wanted, fair, right etc etc is moot)

One thing does concern me though, and that is the potential lock in and DRM lock out that all these various proprietary eBook readers get.