Image credit | Dave Bleasdale

eBook prices might be elastic, but book sales aren’t

Or why two plus two doesn’t equal 5

The dispute between Hachette and Amazon over contract terms got ugly over the weekend. Amazon sent a mass email to Kindle Direct Publishing authors calling for them to lobby Hachette’s CEO to change the company’s pricing strategy and then social media exploded. Typically for a publishing row though, the furore hinged not on the argument itself (that publishers keep eBook prices artificially high) but a selective quotation of George Orwell writing about Penguin paperbacks in the 1930's that was in the letter.

‘The famous author George Orwell came out publicly and said about the new paperback format, if “publishers had any sense, they would combine against them and suppress them.”’

Everyone from Gawker to The New York Times has lined up to criticise the use of a juicy quote out of context. It does feel a bit rich given that many publishers aren’t above editing a jacket themselves though. Next time you see a book described on the flyleaf with a single word or phrase like ‘phenomenal’ beware. Without the context you can’t tell whether the reviewer said it was a ‘phenomenal read’ or ‘phenomenal load of tosh’. The rule is the shorter the pull-quote, the meaner the review.

But what has got much less scrutiny so far this assertion made later in the letter: -

‘Moreover, e-books are highly price elastic. This means that when the price goes down, customers buy much more. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.’

I’ve blogged about the sketchiness of publishing market statistics before for Futurebook. In my experience, data isn’t used for the purpose of analysis, but to make a rhetorical point. This means we should exercise caution when booksellers and publishers come bearing figures. So it’s worth taking a closer look at whether what Amazon claims (theoretically) is borne out by what we know about book sales.

Amazon’s argument is basic capitalism. Lower prices stimulate demand and grow the overall size of the market. It’s exactly what we’re told kickstarted the Western economies at the beginning of the 19th century in school. Britain and the US got rid of all those nasty mercantilist taxes and tariffs on rum and sugar etc, kickstarting international trade and making the west rich.

The trouble with this argument is that by the most reliable estimates available for the US and UK, the publishing market is not growing. It’s static or shrinking. In the UK, The Publishers’ Association’s (PA) 2013 Year Book tracked a £100 million year-on-year decline in revenue from books between 2012 and 2013. Its US equivalent, the Association of American Publishers (AAP), also reported a 1% decline in revenues — down to $7.01 billion in 2013 from $7.07 billion in 2012.

If you’re looking for a bright spot in this rather dingy picture it’s tempting to try to find it in eBooks. But even though everybody wants to be optimistic about eBooks (yes, even publishers!) the outlook is mixed.

The PA reported that revenues from eBook sales had grown to £509m in 2013, up from £258m in 2011. The AAP, however, has tracked stagnation, and even a small decline in eBook revenues. In 2012, US publishers earned $3.o6bn from selling eBooks, but in 2013 they netted $3.04bn.

If we look at unit sales rather than revenue things do look a bit more rosy. In the US, sales of actual eBooks grew 10.1% in 2013 to 512.7m, according to the AAP. The PA did not report on volume sales of eBooks in its last Year Book, but Nielsen’s latest Books & Consumers figures (which are the other best estimate available for the British market) stated that UK consumers bought around 80m eBooks in 2013, and said this represented 20% year on year growth.

So what do these figures tell us?

In the UK, consumers may have bought 20% more eBooks in 2013 than 2012, but the overall size of the total publishing market still shrank. At a macro level, digital books are cannibalising print books and returning lower revenues.

In the US, consumers bought an extra 46.7m eBooks in 2013. Yet they spent $20m less overall on them than they did in 2012. (Interestingly, AAP data encompasses all eBooks with ISBNs, which means a hefty chunk but not all of self-published titles are included.)

This means that between them, publishers and (some) self-published authors in the US effectively gave away 50m extra books for free last year. Excellent news for consumers, who get cheaper books, but given that this strategy eats away at the often scant margins of author, publisher and bookseller alike, is it sustainable?

Based on what the numbers are doing at the sector level, Amazon’s claims that lower priced eBooks sell more units does hold water. Both the US and UK are selling more eBooks every year. The theory springs a leak when we look at its suggestion that lower unit prices net higher overall revenues. Unless Amazon is looking at a very different set of figures (which is possible) they just don’t. eBook prices might be elastic, but book sales aren’t.

Speaking for myself, the biggest casualty of this whole business isn’t the publisher, bookseller or even the poor author. What all this sound and fury threatens to damage most is the underlying profit motive that keeps the book business in business.

The combined rhetoric of the past few weeks seems to suggest that there’s something morally wrong with the idea of wanting to write, publish and sell books to make money. It has set authors, publishers and booksellers off against one another. It’s stoked outrage, convincing each party that the other’s profits are unearned and unreasonable. To use an Orwellian example, it puts ideology before the facts. We are told, repeatedly, that 2 + 2 = 5 when we know that 2 + 2 = 4. Which brings us neatly back to Orwell, and what he wrote immediately after that selective quotation:-

‘It is of course a great mistake to imagine that cheap books are good for the book trade. Actually it is just the other way about. If you have, for instance, five shillings to spend and the normal price of a book is half-a-crown you are quite likely to spend your whole five shillings on two books. But if books are sixpence each you are not going to buy ten of them because you don’t want as many as ten; your saturation point will have been reached long before that. Probably you will buy three sixpenny books and spend the rest of your give shillings on seats at the “movies”. Hence the cheaper books become the less money is spent on books. This is an advantage from the reader’s point of view and doesn’t hurt the trade as a while, but for the publisher, the compositor, the author and the bookseller it is a disaster…’