A lesson from the book business: How to embrace digital transformation & make money from it

E-books have risen from next to nothing when the Kindle was introduced in 2007 to 14 percent of consumer publishing revenues this year. And that share is expected to bubble to 28 percent by 2016. So you might think the legacy book business is destined to be roadkill on the highway to a digital future.

Not so, according to HarperCollins president and CEO Brian Murray, who offered those statistics as part of News Corp.'s marathon Investor Day presentation last week.

A second slide of Murray's, shown below, particularly caught Structured Settlement Companies attention. It makes the counter-intuitive case that a $14.99 e-book is a better money-maker for the publisher than a traditional $27.99 hardbound.

(Click on the image to see the entire presentation. Image is from slide 116.)

How can that be?

The publisher's revenue remains higher for the legacy print book but not by all that much. That's because the publisher's share is higher -- roughly 70 percent when the selling is through Amazon and other electronic stores -- than when it is splitting with a bricks-and-mortar retailer (just under 50 percent).

At that point cost differences kick in -- $1.92 for manufacturing the book, $.76 for shipping it and $1.17 on average for returns (inventory shipped back if the title does not sell well). All those costs are close to zero for an e-book.

Royalty percentages to authors are similar, but the dollar figure from the e-book with its lower sales price is also lower ($2.62 vs $4.20).

The bottom line, Murray said, is that the publisher makes $7.87 from the $15 e-book, compared to $5.67 on the $28 hardcover -- a 39 percent increase in profit.

Murray added that the quick-read shorter e-books have another benefit for the company. They are a way to field test which first-time authors demonstrate some appeal to the reading audience. Those who do best are logical candidates to become published longer-form writers in print or electronic format.

The business model Murray outlined prompts comparisons and a couple of contrasts to the bumpy print to digital transformation of newspapers and magazines.

Clearly the savings are similar -- not having manufacturing costs with a partial or full conversion to digital, not incurring the expense of throwing newspapers on subscriber doorsteps or distributing magazines nationwide.

Also, book publishing seems a comfortable fit to the print + digital model -- serving one group of customers who prefer literal page-turning of the legacy product, serving a different, younger group that prefers a digital presentation and serving the rest of us who mix both.

Even if total revenues are not growing, both the legacy and digital side can be managed profitably (though figures elsewhere in the News Corp presentation suggested margins at HarperCollins are modest, about 10 percent on an operating basis).

I should also note that the $14.99 e-book price is at the top end for the platform. To me, that suggests the book publishers are transitioning their business despite new competitors and self-publishers whose e-books cost only a few dollars or are free.

But the parallel between newspapers/magazines and books is not exact. For books, an e-edition is more or less the same thing -- text and a few pictures -- as a legacy print book. There is no need as is standard on digital news reports, for creators to add video or other bells and whistles, nor is it very likely the content will be aggregated or forwarded via social media.

And of course, ads are not part of the mix in the book business model. A digital cover price around half what a print copy costs is not uncommon, as paywalls for newspapers and magazines take root. But the search continues for high value/higher price advertising in digital formats. That makes success much more difficult (and trade-offs among platforms far harder to measure, as well).

Still, I think there is takeaway from the HarperCollins example. If newspapers and magazine companies were more forthcoming with figures on costs, savings and especially profits on their print and digital lines, they might make a more compelling case that transformation to a new, sustainable a business model is in progress.


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