unless a very different model evolves, ebooks can never become the dominant version of content sold by book publishers

Very interesting analysis by a publishing industry insider, Evan Schnittman:

Excerpts:

“Publishers are in a funny position. To get top authors, they bid against each other and drive publishing costs through the roof. To recoup this investment, they have to pre-sell very hard and get too much inventory out onto the market, in order to bring in the cash to cover the investment. Then after some time, the unsold inventory comes back for credit, which forces us to publish more books in order to sustain our position! The cycle is never-ending and sounds all too similar to certain less than legit investment portfolios featured in recent headlines.
So what does all of this have to do with ebooks?

Well, for starters, ebooks don’t follow these rules. Ebooks are effectively sold on a consignment basis – meaning the money for the sale is distributed after the sale is made, not up front. Stores don’t buy inventory, they put the file in a database and distribute copies as they are sold. This means that ebooks don’t have a huge returns problem, but it also means they cannot generate short-term cash flow like print books do.

Furthermore, when you look at the pricing models that trade ebooks have engendered in the market, you see that publishers have allowed pricing to be controlled by forces that are looking to control over an emerging market rather than those who need to fund the content creation. Ebooks (at best) are selling for less than 50% of the hardcover price – often at 35-40%.

On the other hand, ebooks don’t carry the same costs of print books. There are clearly no manufacturing or printing costs. However, publishers still have to buy the rights to a book no matter if that is an ebook or a print book – paying advances against royalties. There is still the need to edit, design and produce the content. In fact, many think that there are greater development costs for ebooks as electronic media opens the work to connections to the world of the web and an incredible amount of related and enhancing content – all of which needs to be managed and edited.

Ebooks will still have to be sold and marketed, just in different ways as there will be far less reliance on an upfront advance buy-in, but far more reliance on ongoing marketing through the use of content and metadata – as well as user-generated content and promotion tools to get the book marketed. These are completely new expenses for publishers who traditionally think of marketing as publicity and display advertising for new books, not ongoing support and marketing for long-term sales.

Finally, the content and its metadata all need to be warehoused electronically which requires investment in technology and staff to manage the technology – be they in-house or a third party entity. Clearly ebooks aren’t free – they are perhaps as expensive or in some cases more expensive than print – yet they do not create large, short term cash flow to cover their costs. Ebooks, if successful, will sink the trade publishing industry.

And therein lies the dilemma… how does the publishing industry fund the creation, editing, design, production, marketing, e-warehousing, and sales of ebooks, if the income isn’t there? How do ebooks cover the huge advances needed to buy books if we cannot generate the cash, especially at their extremely low, discounted prices, cover the advances that an entire industry has come to require? The answer is that ebooks, alone, cannot.

What this means is that unless a very different model evolves, ebooks can never become the dominant version of content sold by book publishers.”