Fictitious profit

Some SFWAns around the Internet have been pointing to this profit calculation to “prove” that rapacious publishers are ripping them off by more than doubling their hardcover royalties on ebooks.  As one has learned to expect from the fun bunch, they have no absolutely idea what they’re doing.

Look at Harper’s own numbers:

$27.99 hardcover generates $5.67 profit to publisher and $4.20 royalty to author
$14.99 agency priced e-book generates $7.87 profit to publisher and $2.62 royalty to author.

So, in other words, at these average price points, every time a
hardcover sale is replaced by an e-book sale, the publisher makes $2.20
more per copy and the author makes $1.58 less. If the author made the
same $4.20 royalty on the e-book sale as he/she would have on a
hardcover, the publisher would STILL be making an improved profit of

Now, I have less use for mainstream publishers than just about anyone who publishes books these days, but this calculation is completely misleading for the obvious reason that it is using the wrong price from which to calculate the profit.  As per DBW:

“After months of consistent declines to a low near $6.00, they’re on the rise again. This week, the average price of an ebook best-seller is $9.48, up slightly from last week, which was the first time the price was north of $9.00 in all of 2013.”

Since the average price of an ebook is more like $8.00 on average, this means that if we plug it into the Harper model, the ebook generates $4.50 profit to the publisher and $1.50 to the author.  And it has gone as low as $3.15, although we can safely disregard this lower figure because it was unduly influenced by low-priced, self-published bestsellers. Regardless, both figures, you will note, are less than the $5.67 in gross profit minus author’s royalty generated by the hardcover sale.

This inability to grasp the basic facts of the rapidly changing market for books is why the SF/F writers are going to be taken completely by surprise when more publishers “unexpectedly” go the way of Night Shade.  These authors think ebooks have made their publishers nearly 40 percent more profitable, all at the expense of the royalties paid to them, when the reality is that despite the ebook’s much lower cost of production, (which, keep in mind, has no impact on the publisher’s overhead), the publishers are actually running somewhere between 20 percent and 45 percent LESS profitable on a per-unit-sold basis alone.

If the publishers were to do as the post’s author suggests and pay the same $4.20 royalty on the ebook that they presently do on the hardcover, they’d make a profit margin of 7.1 percent instead of 42.6 percent.  That would barely pay their rent and utility bills, never mind their payroll.  Note that historically, commercial publishers have run at 40 percent profit margins; even the powerful academic publisher, Elsevier, has seen its operating profit margins slip to 36 percent.  SF/F genre publishers aren’t doing anywhere nearly so well.

Falling retail prices and shrinking profit margins are why the publishers have been cutting their midlist authors and offering fewer, smaller contracts.  They simply can’t afford to publish moderately successful authors anymore, and if average ebook prices fall to $4, as I expect them to within the next 2-3 years, they will not be able to afford publishing anyone who hasn’t already proven to be a reliable bestseller… usually through self-publishing.