The price of everything
The cynic knows the price of everything and the value of nothing.
– Oscar Wilde
This is a meditation on the price of things in general; but in particular, the price of digital things such as software, games, music and e-books.
It goes without saying we always want to pay as little as possible for whatever we buy. Ideally, we would like everything to be free. But in the real world – at least in the real, non-digital world – we acknowledge that things must have a cost. We still prefer to pay as little as we need to, but we are usually prepared to pay more than the minimum in order to obtain a desired level of quality or value. For example, rotten tomatoes may be selling at 50c for a 5-kilo bag; but we would rather pay more, if we can afford it, to get good quality tomatoes.
In the non-digital world, it costs the farmer something to plant and raise tomatoes, to pick them, and to transport them to the shops. The shops have other costs such as the cost of labor, electricity, rental, the costs of marketing, and so on. These are real costs borne by real people.
All of this means that we basically accept that we have to pay a reasonable price for our tomatoes.
In the equally real, but digital world, the same logic ought to apply to our buying behavior, but there’s an important fact which puts a significant spin on it: the costs of duplication and of distribution of digital items are essentially zero.
Note that I specifically do not say that the costs of production are zero in the digital world. That is far, far from being the case.
The developer who writes a shareware program; the artist who paints a beautiful digital wallpaper; the musician who records a song; the author who writes a book; all supply their labor at the cost of their time, and they also have other significant costs such as equipment, Internet access and electricity. These too are real costs borne by real people.
The big difference between these creators and the farmer is that supply of the digital items they produce is infinite. The cost of duplication is essentially zero, and so is the cost of distribution. A million copies of a song – once it has been created – can be made for the same cost as making one copy, and distributed for essentially no cost to a million computers.
Some people have considered these latter facts to justify paying nothing for such items. But this is clearly unrealistic and unsustainable. The copying and distribution costs may be zero, but the cost of production is not. Some creators may be in a position to donate their labor and subsidize their own costs in order to make their creations available for free; but it is hard to imagine a culture in which this is the norm, unless creators are fully supported by the State (not a healthy situation).
So, sellers must set a price on their digital items. The question is – and this is really the point of this meditation – what is a fair price to set?
E-book prices are in the news because of the recent contretemps between Macmillan and Amazon, with Macmillan winning the battle (but probably not the war) to push up the price of some Kindle books to $14.95. So let’s look at e-books.
I have seen all sorts of calculations on the Internet about what the price of e-books should be. I have even done a few calculations myself, based on reasonable assumptions about the flat costs (the flag-fall, if you like) of producing a book, together with the variable costs (the costs per book sold). Given an accurate estimation of these sets of costs, the only variables which remain in determining whether a book is profitable are the retail price of the book, and the number of copies which are sold.
Anyway, here are two sets of figures based largely on guesswork, but not too far from reality, I think. In each case I have used Goal Seek in Excel to come up with the number of copies which need to be sold to ensure a 5% return to the publisher. In the case of the e-book, I have allowed a small percentage for duplication and distribution (rather than making them zero).
Unless I’m completely out in my estimates* (perhaps in the percentage that the online retailer will take), it seems to me that an ebook should become profitable at a smaller number of copies sold, even at a much lower retail price point than the physical book. And once you have paid for the flat costs, the low per-sale variable costs of e-books mean that you rapidly start to make a lot of money once you are past the break-even point.
The number of copies sold depends enormously on the elasticity of demand. If you halve the price of a book, will you sell twice as many copies? Perhaps not quite. But it does seem reasonable to suggest that you will certainly sell more copies if you discount the price.
But in the current commercial world, publishers seem to be pricing ebooks at ridiculously high prices. For example I just bought Wolf Hall by Hilary Mantel, the current Man Booker Prize winner. I bought it from Amazon in hardcover. It’s a beautifully produced book, really nice to hold and to look at. A Kindle version is a sad, ephemeral thing in comparison – it’s only advantage at all over the hardcover is that it is more portable. Yet have a look at the Amazon page below, and note the comparative pricing. $15.79 for the hardcover, but $21.10 for the Kindle version.
When an e-book costs far more than the hardcover version, something is badly wrong. More to the point, who in their right mind would buy the e-book version of Wolf Hall at that price, when they can buy a ‘real’ book for less?
If $15.79 is a fair price for the hardcover, you cannot convince me that $21.10 for an electronic version is a fair price point. That price has been determined not by the economics of the situation (because a lower price for the Kindle version would mean the e-book sold well, maximizing profit and return to the author) but by the publisher’s misguided sense of the value of their work.
The digital economy has some way to go yet before it works properly.
* Feel free to correct my assumptions!
