Clicks v. Mortar

Old businesses aren't wising up like new business. This is nowhere more prominent that in the industry of turning out merchandise based around intellectual property: books, software, movies, music. IP Manufacturing. Someone dreams it up. But an industry pipes it to consumers.

A friend of mine is a Baen Books online subscriber. For a small fee (about the price of two books), he has access to new books published electronically and access to old books that may be hard to find. For a voracious reader like my friend, it's a good deal. Other publishers haven't figured it out. Here's some publication math-- some math that the publishers have forgotten:

$20.00 - The cost of a book
$11.00 - The price the book seller pays (they sometimes pay more with a guarantee of being to return unsold copies.
$10.00 - The price the publisher charges the book distributor.
$4.00 - The price to print the book (to fire blank sheets through a machine and have it come out full o' words)
$1.20 - The amount of royalties that go to the author.
$2.80 - Potential gross profit made by publishers (factor it down to allow for editorial and promotion expenses-- two things that publishers have tried to abandon).

Take a real look at these expenses. When you publish an electronic edition, most of these expenses go out the window. From the publisher's perspective what you're left with is $1.20 in royalties and $2.80 in gross expenses/profit expectations. If a publisher were to output electronic editions, they could sell them for $4.00 and make as much profit as before. Heck, add in $1.00 per copy to cover e-commerce handling fees and bandwidth charges. There is the argument that people look for books in stores and electronic editions may not sell as well. I don't agree with that argument. In a store, people are willing to pay full price to walk out with a print edition. Online, they want the information for free. If you drop the print edition print, the chance of a sale goes up. If you attach a price to a web edition, the chance of a download goes down. But, if the online sale price is close to nothing (e.g. $5 for 400+ pages of material), there is still a good chance that someone will buy it. While specialty items like computer books and gaming books may see 10,000 copies sold, if they're peddled to hundreds of millions of potential customers, a publisher could sell more than 10,000 copies and reap more money than a print edition. If you look around for electronic editions, what do you find? 20% off of the paper edition. Gimme a break. You're saving 80% of the overhead and you're going to pass on 1/4 of that savings to me? Why not you just keep the book, take a bath on it and I'll buy it from a discount bin next year? Then we've killed some trees, I've lost the immediacy of ownership and you have no profit?

Recently there was a micro-furor over Galactic Civilizations II. Somehow word got out that the software producer was encouraging piracy. Not so. But, really they sort of are. You can go into the store and buy a copy for $40 from EB Games or download a copy for $45 from the GalCiv site. EB Games' distributor bought it for $20-25. GalCiv's makers had to hand the box-printer-CD-burner-people $10 to print the physical edition. Why, oh, why should this cost $45 to download and not $15? My only theory is that they are fearful of honking off the distribution chain that doubles as their promotional chain. They should take that risk. People unwilling to spend $40 or $45 are spending $0 to get the game. That's likely to honk off everyone except the gamer.

What spurred this rant was Movielink. They are offering you the chance to download their movies for approximately the cost of buying them in a store. The copy you buy in a store fits on a DVD and its packaged and it might have snazzy labelling. The copy you download chews up 4GB of disk space. If your drive gets nuked, you lose the movie you paid for. If you want to copy that movie onto a disk for viewing, say, a TV: too bad. Burnable DVDs have less capacity than commercial DVDs to thwart piracy. If I were to download something illegally, the poster would have compressed it for me so it could fit on a disk. If it got nuked: who cares. I didn't pay for it. You know the formula above for books? The formula for DVDs is waaaaay more skewed. Of the $30 retail for a movie, $3 goes into the physical part of the purchase (disk, case, label). About $8-12 ends up in the pocket of the studios.

Hollywood and IP manufacturers need to figure out that pricing is the only weapon in use. The freebies on the net are hard to find and carry the stigma of being illegal. But they're free. People may not spend $30 for store bought copy. They are less likely to spend $28 for a downloaded copy that clogs their hard drive. But, if you were to offer up a copy for $10, people may go for it. The retailers and traditional distributors will go the way of the typewriter, but the manufacturers will stay in the game.


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