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Left to themselves, companies perpetuate the problems that their businesses solve

– likely not a new idea, but perhaps a new example


This weekend, I fired up the Kindle application on my iPad to buy Lords of Finance, but the price astonished me: the ebook costs $14.99. How much is the paperback, you ask? $12.24. 

With these prices and zero distribution cost, I figured publishing houses must be fleecing me. In February, Motoko Rich, a reporter for the New York Times, presented a simplified unit cost analysis copied below:

 

 

Unexpectedly, Rich argues profit margins for publishing houses are roughly equal for print books and ebooks sold at $12.99. Should they be the same?

Houses built on shaky foundations

After Gutenberg’s press heralded the golden age of publishing, publishing houses cropped up to assist authors and readers by selecting content to be published, editing the work, outsourcing the cover design & production of the book, marketing the book and outsourcing its distribution. For this labor, the publisher receives about 40-50% of the gross revenue. Decades ago, authors found the connections, expertise and financing essential for their success.   

Today, distribution and marketing assistance are of far less value and publishing houses should and will be compensated less.

Parallels to music

Over the past 10 years, self-publishing of music has flourished and about 50% of music revenues are generated from a middle class of bands – a far cry from the top 10 bands of the Casey Kasem era which garnered upwards of 85% of revenue. Most of this middle class have no record label.

If the main value proposition of a publishing house is distribution, and if Amazon & iTunes provide online distribution to millions of users for authors who self publish, why is a publishing house still entitled to their $4.85 for an ebook? Because companies perpetuate the problems that their businesses solve. It is in the best interest of the publishing houses to hold on to whatever control over distribution they might have, resulting in my $15 eBook. Like holding onto a fist of sand ever more tightly, it’s only a matter of time before the jig is up.

Industries where the key players are struggling to hold onto outdated business models are the best targets for disruption. I am looking forward to lower eBook prices with higher margins for authors.

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2 thoughts on “A Corollary to the Innovator’s Dilemma

  1. I’m currently reading Lords of Finance, I think I only paid $11.49 for the paperback at Costco. I wonder if the extra margin publishers want for ebooks is justified by the expected piracy of the format (will loses outrun the used and hand-me-down book market?).

  2. It could very well be, but the DRM on the Kindle books is pretty solid from what I understand. And book publishers don’t participate in the second hand market transaction at all (i.e. when reselling my book I don’t may much to Penguin).

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