Part 1

Steve Jobs thrilled some people and infuriated others when he announced that Apple’s new eBook app will use the agency model for pricing.

Translation: publishers can set the price of their eBooks, and Apple will take a standard 35% discount, or commission.

Amazon was up in arms, because it believes eBooks should be a low-cost alternative to paper books.

Translation: keeping all Kindle prices under $9.95 would help push Amazon’s Kindle—which requires a unique format unusable on any other eBook reader—into the top spot in the eBook-reader market.

In Amazon’s business model, Amazon sets all eBook prices and pays publishers a commission—negotiable for larger publishers, non-negotiable for smaller and independent houses. Traditional publishers have been grousing about this policy for some time. When Amazon grudgingly agreed to accept agency-model pricing —with the stated emphasis on “grudgingly”—they managed to get into such a fracas with Macmillan that they killed the “Buy” buttons on most Macmillan titles. While this situation lasted hours, not months or weeks, it received damn-near minute-by-minute press thanks to the flurry of IMs, text messages, twitters, blog postings, and comments scurrying around the web.

Once consumers found out about the Apple/Amazon/Macmillion/agency model/Random House situation (a good 7.32 seconds after the industry found out) …

Translation: Random House took their sweet time making a deal with Apple and so were not included in the otherwise all-encompassing list of publishers who had signed up to play with Apple and thus caused a minor ripple about preferential treatment that didn’t even have a chance to spread very far before it was squashed with another announcement.

… more blogs and IMs and twitters and text messages and comments flooded the Ethernet as people expressed their outrage at the cost of eBooks to the reader and the unfairness of DRM.

Translation: Digital Rights Management (DRM) is the technology that lets eBook manufacturers, publishers, copyright holders, and booksellers control the electronic material the consumer buys. Examples of DRM that really push consumers’ buttons include the seller’s ability to yank paid-for material off an eBook reader and the inability to lend or sell eBooks by transferring them from one person’s reader to another.

Part 2

All of which logically leads to the question: just how much does it cost to produce an eBook, anyway?

I’m a ghostwriter, not an accountant, so we’re going to work with round numbers pulled out of the air in an extremely simplified example. Let’s start when a manuscript lands at the publisher’s door. We’ll stipulate that it’s a good book, that the agent called ahead, that the acquisition editor expects it to show up on (arbitrarily) her desk, and that a contract will ensue. We’ll include man-hours and cash outlays and keeping a running balance on the side.

Start the dollar countdown:

Getting the “Requested Material” physically from the mailroom or electronically from the editor’s inbox costs, let’s say, a single man-hour arbitrarily valued at $10 per. Cheap labor is good to find.

$10

The editor has to read the manuscript. Since much of the brouhaha is over fiction, we’ll make it a standard 350-page novel, and we’ll value the editor’s at, oh, $25/hour. Let’s say it takes her ten hours to read and fall in love with the manuscript. That’s pretty fast—I would take longer—but we’re working with round numbers and I have a limited number of fingers, even using both hands.

$260

We’ll dispose of the in-house decision-making meetings, discussions, push-and-shove, etc. in another ten man-hours—that includes all the people with whom the editor has to meet, some of whom make more than her and some of whom make less. Again, probably low, but I don’t want to have to take my shoes off. We’ll average them all out to earning $30/hour.

$560

Not too expensive so far. Now let’s negotiate the contract. No one is really disputing the cost of Jane Doe’s eBook—they’re disputing the cost of Stephen King’s new eBook, or Sue Grafton’s new eBook, or Elmore Leonard’s new eBook—but let’s make ours from an author whose reputation is rising but not yet star-level. We can probably get away with offering $60,000.

$60,560

Nice try, but the agent has other ideas. Another round of meetings, this time between the editor and maybe even the publisher with the marketing and legal departments. We can stick to another ten man-hours (low, low, low), but the average cost is now closer to $60/hour, and the final negotiated deal is $75,000. Agents are worthy of their hire.

$76,160

Huzzah! We own the book! Now things start pricey. The editor is going to spend at least 80-160 hours doing what editors do best (and most): editing. We’ll average it out to 100 man-hours at $25/hour. You’re right—that’s not much, but publishers expect the heavy editorial to be completed by the time they look at the manuscript. Chalk up another $2,500, minimum.

$78,660

Interior design really, really, low-ball: 40 hours @ $20/hour.

$79,460

Cover design: 80 hours @ $35/hour.

$82,260

ISBN, LCCN, CIP paperwork & follow-up: 5 man-hours @ $15/hour.

$82,335

Marketing. The industry rule of thumb is to spend the same amount marketing and advertising a title as it cost to buy the title—in this case, $75,000.

$157,335

We’d be fools to try to recoup over $150,000 on eBooks alone, especially since only about 6% of the population have readers and digital still only account for about 4% of total sales. Ergo, we have to print. If we print 25,000 copies—a gamble—our production cost should run approx. $.75/copy or $18,750

$176,085

We’ve got that $75,000 worth of advertising supporting our sales, so we need to get those books out to our distributors, wholesalers, and booksellers. The average distributor takes a 60% discount; wholesalers take 50. We’ve priced the title at $12.95, so we get $5.18 through our distributors and $6.47 from our wholesalers, for an average of $5.82 per book. If we sell out our initial 25,000 copies at an average return of $5.82/book, we recoup $145,500.

$30,585

We’re still in the red, but we’re getting close to breaking even—not making a profit to boost our budget for buying another book, just barely covering the costs of publishing this one. But hey—what about those eBooks? That cost is minimal at best: say, 10 hours of technical man-hours at, oh, $20/hour. That’s  $200, barely raising our nut.

$30,785

Let’s say the eBook sells for an average retail price of $9.95, Amazon’s comfort number, that we net 35% of that $9.95, or $6.47, and that 1,000 people—about 4%—buy it. Cool! We’ve made $6,470.

$24,315

We’re still over 10% in the red even without taking myriad other costs into account: bookkeeping, troubleshooting, production overruns, flat covers, and so on and so forth, and scooby-dooby-do. A lower advance won’t make any real difference because we’ll just go with a smaller print run and smaller marketing budget.

If we sell out that initial print run in a week or so, we’ll do another immediately. If we don’t run out for six weeks, we’ll calculate the potential against the cost—after all, we don’t have any more marketing/advertising dollars to spend. If we’ve still got books in the warehouse after six months, we’re not going back to the printer unless the author does something newsworthy to make demand shoot up. As far as eBooks are concerned, any additional sales will be trickles since we’ve already factored in the expected 4%.

Part 3

“But wait!” I hear you cry.

“I’m not going with a traditional publisher. I’m going with a nifty ePublisher whose web site promises to that all I have to do is pay $99 and we’re in business!”

Good for you! Since you have 10,000 Facebook friends and all the time in the world to promote your book because you don’t have a day job, the public will probably flock en masse to buy your eBook.

Approximately 5.8% of the reading public, that is, because that’s about how many people own an eBook reader. Let’s add another 1% percent who will read it on their computer. Oh, heck, let’s make your potential eBook audience an even 10%. The publisher has priced your title at a tempting $4.99 and you only have to recoup $99—hey, you didn’t waste your money paying for their phony extras. Figure you get 50% of that $4.99, or $2.495, so when 10% of your 10,000 Facebook friends buy your eBook—an inflated number, sure, but we’re going for the gold here—you’ll net $2,396, because you don’t count your own man-hours or value. Of course, unless all those people buy at the same time, your income will trickle in at a couple bucks per month, but hey—you’ve got an eBook!

Are these figures accurate?  Nope. I pulled them out of the air, remember? But the concept is solid. As authors, it’s easy to forget that books are business, and business is all about moving units.

Warning! Shameless Self-Promotion Ahead

If you had spent $25,000 to hire a professional to get your manuscript viable in the traditional-publishing world and had captured that $75,000 advance—or even a $40,000 advance—you’d have made at least $15,000, maybe $50,000, all at one time, with the potential to make a lot more since, after all, you have all the time in the world to promote your book. And having that money all at one time would have given you the funds to do a lot of specialty marketing and promotion, so yeah—more people would know about your book and want to buy it.

Just something to think about.