Accounting and Ebooks

I’ve been reading lately that publishers lose money on ebooks. This sounds counter-intuitive because ebooks have no printing costs, so I want to look at this from another point of view, bringing my abandoned but not forgotten accounting skills to the question.

Publishers, like any business, have both fixed costs and variable ones. For argument’s sake, I’m just going to use easy to figure out numbers.

The variable costs are easy to attach to books. If it costs $1,000 to do a print run for 1,000 books, then printing costs $1 per book. But what about fixed costs, the ones that don’t change based on how many or few books are published? The fixed costs are considerable, the cost of office space, salaries of publishers, editors, assistants, office cleaners, assistants, sales staff, coffee machines and more.

Something has to be done with that to figure out how much to charge for a book. Let’s say all those fixed costs add up to $2,000 a month. And the publishers estimate that they publish 200 books a month. Then the cost per book would be $10. If you add another $1 for printing, then that means the book costs $11 and the selling price should be more than that. If the royalty to the author is 10%, we’ll add on another $1 for that (keeping numbers rough and round) and make it $12 total cost. If the book sells for $16, then $4 goes to the publisher. Their profit.

If an ebook sells for $9.99, and the cost is $12, then the publisher loses $2. It all makes sense, doesn’t it? But wait.

Let’s go back to those fixed costs a moment. I see a couple of problems with that. First of all, the cost per book is radically altered by the number of books published. If you can publish 400 books with the same fixed cost of $2,000, then that would mean only $5 per book. No printing costs for ebooks. So if $1 goes to the author, the total cost is $6. If the ebook sells for $9.99, then the publisher still nets $4, same as in the example above.

The question is further complicated by the advances on royalties that publishers put out. If they spend millions on a book that bombs, how does that ripple out to affect the way costs are tacked on to other books? I don’t know, but my suspicion is that tucked away in fixed costs is probably something like “reserve for losses” or some such so that bungles like that can be spread out over all the books.

Here’s another complication: how many quality books can be published with the same fixed overhead? There’s certainly pressure with the way accounting works to put out alot more books so that the cost per book gets smaller. But is it wise?

And another question: what overhead is really needed to produce a good book. Do you need the big office, the nice furniture, the expresso machine?

My opinion may differ from the opinion of people who have an investment in things as they are. But think about it. What do you need to sell ebooks? Good writers, good editors and someone to organize their working together. That could fit any number of infrastructures, not necessarily in the present formulation. Even promotion is something that nowadays most writers are expected to do for themselves.

As writers, for the present moment, we are bearing the brunt of the fear and change rocking this industry. But what we do is independent of how books are made and distributed. We just need to keep doing what we’re doing. And a small lesson in accounting can help us put fear aside and see the possibilities.

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7 thoughts on “Accounting and Ebooks

  1. Wow, this is so great, LN. This sort of accounting, this call for new ideas, new methods. And this reminder to us writers to simply do what we do. Let business be business.

  2. The book I was reading, Thompson’s Merchants of Culture covers some of this. The big publishers gain tremendously from economies of scale, but then they also have the biggest overheads (salaries are often responsible for this). Most of the really big publishers are also part of even larger conglomerates – the money that gets lost in through unearned advances can be found in these big conglomerates from other places. But for medium sized firms or smaller ones, they simply cannot play the advances game the same way, because a loss like that would finish them off. The small publishers do already club together on things like distribution, and there are distributors who work solely for them. However, one of these distributors went to the wall a couple of years ago, and, having lots of other people’s books tied up in their warehouses, unable to be shipped about, many of their small publisher customers went to the wall, too. That’s the only problem with the cooperative – if one goes down, the knock on effect can be very damaging.

    It’s just a really tricky business, because the costs are large and so are the risks. But people go into it because they love books, and always will.

    1. I think the love of books is this industry’s greatest strength and because of that a new path will be found.

  3. I like the way you phrase this. The mark up of eBooks is based on a publishers price and what they need to charge as a business. I like the Indie route that’s open because they can circumvent most of those built in costs to reach readers.

    Sometimes I think Amazon opened their eBooks up to Indie authors because they wanted to break legacy publishing’s stranglehold.

    1. You have a point there, Coral, but I suspect that it’s more about being top dog (amazon) then any altruism.

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