Why the commercial ebook market is broken

Posted on April 15, 2007 in Uncategorized


(Note: In the following rant, I’m sticking to American currency and prices because (a) they’re relatively familiar to non-Americans, and (b) they’re where I’ve got the hardest data. Not to mention (c) being where the market I’m talking about is — or isn’t.)

I’ve been ruminating for a whole long time now about the dog that didn’t bark in the night time world of publishing — the coming ebook revolution, which has been coming now for something like 20 years and counting without much sign of actually arriving.

In point of fact, ebook sales figures are dismal. At best, they tend towards 20% of hardcover sales by volume — and that’s for ebooks that are available in open formats that are not tied to a particular hardware platform, and that are not crippled by DRM (digital rights management) encryption schemes that prevent users from reading them on more than one machine. DRM-infested ebooks sell an order of magnitude fewer copies, in many cases not even covering the cost of taking the existing typeset masters and saving them in an ebook format.

The performance of the ebook market is in fact very poor. It can be explained in part by readers’ natural aversion to DRM (if you change mobile phone or laptop, why should your entire library evaporate?), but also in part by publishers’ idiotic aversion to the idea of trusting readers.

When you look at the "pirate" ebook field, things are a lot livelier. There are any number of locations on the internet where you can grab hundreds or thousands of novels, for free! — albeit in violation of the authors’ copyright. These books are either produced by scanning a paper copy and feeding it through OCR (optical character recognition) software, or by cracking the DRM on an encrypted ebook. Lots of people download books off the net, but one thing even the proponents of ebook DRM agree is that it doesn’t seem to have had any economic impact on the sales of dead tree editions. In fact, there’s a lot of evidence from research into music file sharing that people who use "pirate" ebooks actually buy more of the real thing. (Eric Flint volunteered this source: The Effect of File-Sharing on Record Sales: An Empirical Analysis, by Felix Oberholzer-Gee and Koleman Strump, published in the February 2007 issue of the Journal of Political Economy.)

So what’s going on?

As Cory Doctorow has observed, the common complaint that readers don’t like staring at a screen for hours on end doesn’t hold water; we actually spend a lot of our time staring at computer screens, PDAs, and tiny little displays on mobile phones

Let me stick my neck out here, with an opinion that goes against the conventional wisdom in publishing circles.  In the pre-internet dark age, there was a subculture of folks who would get their hands on books and pass them around and encourage people to read them for free, rather than buying their own copies. Much like today’s ebook pirates, in terms of the what they did (with one or two minor differences). There was a closely-related subculture who would actually sell copies of books without paying the authors a penny in royalties, too.

We have a technical term for such people: we call them "librarians" and "second-hand bookstore owners".

Library lending was tolerated by authors and publishers because it was widely accepted that in the long run, people who borrowed our books from libraries were more likely to read them than people who had no access whatsoever. And having read, they were more likely to become regular readers and to eventually buy — if not the books they’d already read, then the next one on. Library users were often poor, or casual readers, or young. I remember latching on to the local public library when I was five or six years old. I read my way through most of Andre Norton’s childrens range before I was eight, and I certainly didn’t pay for them. I couldn’t pay for them; I didn’t have enough pocket money to make a habit of buying books at anything approaching the rate I could read them until I was in my teens, and even then, I was mostly limited to second-hand paperbacks.

So, in the dark pre-digital age of the 1970s, I was an avid supporter of that period’s equivalent of your demonic ebook pirates. And y’know what? I defy anyone to tell me I was wrong to do so. Or even to assert that it hasn’t, overall, been a good thing for the SF field, because it got me into the habit of reading, and these days, with a disposable income, my biggest problem is finding bookcases to stick all the new hardbacks I’ve bought over the years since my teens.

Now, let’s talk about ebooks.

I’m not going to flog the already-dead DRM horse; I’ve been there before and both sides of the debate are fairly well covered.

What I’d like to point out is that the economics of the commercial ebook market are sick.

Right now, many of the largest publishers charge a cover price for ebooks that is 80% to 100% of the hardcover price. Virtually nobody except Baen (and now a couple of other publishers who’ve dipped a toe in the Webscription market, and some self-publishers) is even thinking about trying to establish what an ebook is really worth in the market.

We know roughly what it costs to produce a book, and we can point to the areas where ebooks are cheaper than paper editions (no dead trees and ink, for one thing; no warehousing or distribution for another) and more expensive (downloads, website maintenance). But we don’t really know what an ebook is worth to the readers, because the market that could give us meaningful feedback on pricing has been strangled in the crib.

My take on ebooks is that they are — and should be seen as — the cheapest form of disposable literature. They’re not cultural artefacts (pace Cory Doctorow); you don’t buy them in signed, slipcased, limited editions. They’re like stripped mass market paperbacks without even the value-added of doubling as wood pulp wall insulation once you’ve read them.

Now, there exists within writing and publishing circles a neurotic fear that sooner or later (probably In Five Years’ Time — that seems to be the normal window) a cheap digital paper based ebook reader will come along, that makes the experience of reading text on a screen no different from the experience of reading a lump of dead tree stitched inside a piece of pigskin. And, as the horror story has it, we will be In Big Trouble, because the pre-existing availability of pirate ebooks will lead to enormous proliferation and a total crash in the value of books. Some pretty smart people believe this story, and the result has been to give it more credibility than it actually deserves. And it leads them to draw what I believe to be faulty conclusions; if you want an example, look no further than this column by Jerry Pournelle. (NB: I don’t want to single Jerry out for specific opprobium, and I think it’s only fair to note that what he’s really talking about is the DMCA. However, I think this article typifies the received wisdom among many writers on the subject of ebooks, piracy, and DRM, which is why I dragged it in here.)

It’s the received, prevalent wisdom — and it’s a load of rubbish.

First of all, if overlooks the point that publishers don’t manufacture ebook readers; the consumer electronics industry does. And the consumer electronics industry will not cut off its own nose to spite its face by producing an ebook reader for $20, if it can produce one with extra bells and whistles that sells for $350. We’ve had the tech for a $20 (or $50, anyway) ebook reader for a decade; it would resemble a grey-scale palm pilot, albeit without even the PDA functionality. But the parts are dirt cheap these days! If a manufacturer thought they could sell the beast, they’d be churning them out by the bucketload — and it’s perfectly possible to read ebooks on a 160×160 green screen. I used to do it all the time in the mid to late 1990s. The reason nobody makes such a beast is because it’s simply not profitable to do so. Explaining why this is so ought to lead into a long essay on the cost structure of consumer electronics, but basically, unless the Chinese government decides to subsidize its indigenous manufacturers in order to deliberately destroy the western publishing industry, it ain’t gonna happen.

Secondly, and more devastatingly for the sky-is-falling promoters of the "pirate ebooks will doom the publishing industry" theory, until ebook readers cost no more than a hardback, 90% of readers will ignore them. And that’s regular readers, not the folks who own four books (and one of them is a Bible). Expecting people to cough up $200 for a reader so that they can then pay $25 for new novels to read on it — as opposed to buying the novels for $25 (less discount) in hardcover and having the cultural artefact — is, well, it’s just bogus.

We might see such a device (at $200) take off in the book club market. Imagine you join the e-book club. Your first sign-up gets you an ebook reader loaded with five titles for $20. Then you have to buy a book a month for the next year before you can leave, and you’re paying $20 a pop. After a year you’ve got 17 novels and an ebook reader, and you’re out $240 for a $200 reader. Most abook-clubbable people will stay in (they’re set up for the club and they’ve already got a small bookshelf on their reader) and over the next year the club can make the profits to pay for that first year’s loss-leader.

But 80% of readers don’t do book clubs. I’ve seen my book club sales, and they’re piss-poor (except in France, which is different).

Basically, the universal ebook reader is a non-starter — at least for this generation — for the same reason that it’s near-as-dammit impossible to sell hardcover midlist novels for more than US $24; consumers don’t like being milked.

Now, having demolished the myth of the $5 ebook reader being just around the corner, the second problemthe publishing industry has with ebooks is their misapprehension of exactly what the "pirate" ebook field is costing them. Some otherwise fairly intelligent folks in the SFWAs anti-piracy committee think they’re potentially costing up to 30% of their revenue stream. I’d like to call bullshit on that.

There’s a figure I’ve heard quoted (unfortunately I don’t know the source so I can’t cite you chapter and verse on it) to the effect that the typical dead-tree book has, over its life cycle, an average of four readers. Moreover, sell-through in paper is around 50-60%; that is, for every book sold to a customer, 0.8 to 1.0 other books end up being returned or pulped. So the real figure is more like ten readers per book actually printed by the publisher.

Think about that. Today, publishers try like crazy to tie ebooks to a single reader via DRM, in their misplaced zeal to reduce profit leakage; but for the economic hit from piracy to equal the economic hit from libraries and second-hand bookstores and friends lending friends books, the unlicensed distribution channels would have to be shifting nine ebooks for every one that is sold commercially.

And you know what? I don’t think most of the ebook sharing subculture is even about reading the books in the first place — it’s about collecting, and participating in a gift sub-culture where your kudos is governed by how much stuff you can give away. Yes, this probably sounds alien to a lot of you. All I can say is, you haven’t spent enough time monitoring alt.binaries.e-books.flood and the other pirate ebook distribution channels. There are folks there who, of a weekend, post more books than I could read in a lifetimes. Random, eclectic, nonsensical collections of books, some of which are hopelessly corrupted and most of which are poorly proof-read. These folks are not reading what they put out. They’re not putting it out with helping other people read the stuff as a primary goal, either. There’s another dynamic at work, and no scheme to stop or reduce ebook piracy stands a chance of working until we understand why it’s happening.

Interestingly, Baen’s webscription titles are under-represented on the ebook warez newsgroups. I don’t think this is an accident. Books that come up most often are either scanned and OCRd paper copies, or cracks of DRM-locked ebooks. If you look at the posters’ activities in terms of proving status within a gift economy this makes sense; OCRing a book or cracking DRM takes time and effort, and is a demonstration of putting effort into something — it’s a high value activity. Whereas posting something you grabbed off Baen’s library of for-free books, or paid $5 for is just stupid — it’s like turning up to a a wine and cheese evening your friends are running on a "bring a bottle" basis with a bottle of Buckfast or Mad Dog 20/20. It’s cheesy, tasteless, and looks cheap, and that’s how the ebook pirate elite will view you.

So, it’s time for me to advance some tentative conclusions about why the commercial ebook market is broken:

  • Most current ebooks are grossly overpriced relative to their utility to the reader. eBooks are actually disposable literature, like mass-market paperbacks only more so.
  • We are not going to see cheap ebook readers any time soon because publishers need them, but consumer electronics manufacturers don’t.
  • Readers won’t buy expensive ebook readers because they’re reluctant to pay over $25 for a novel at the best of times. Only bundling a metric shitload of high-value content with a reader will make it attractive.
  • Insofar as there are no lending libraries or second-hand bookstores for ebooks, ebook piracy is the equivalent niche to those traditionally tolerated outlets.
  • Historically, only 25% of readers paid into the authors revenue stream. A 75% piracy rate may therefore be seen as a continuation of business as usual.
  • The pirates are not motivated by profit but by a poorly-understood social phenomenon connected to status in a gift-giving forum.
  • We do not know what ebooks are worth to readers, but the relative lack of Baen product in the usual places suggests that if unencrypted ebooks are readily available at an affordable price (i.e. less than an MMPB) then demand for the pirate edition will be reduced.
  • Which leads to the next question: what is to be done?
(To be continued, when I get around to it …)