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The economics behind Apple’s iBookstore

18 February 2010 20,902 views 6 Comments

From the day of the iPad launch, we have been puzzled by Apple’s pricing decisions specific to the books listed on the iBookstore. One of our “must-do” posts has been this: To take a detailed look at the economics behind the iBookstore. Our analysis below.

1. For our analysis, we have taken the case of a book thats released in hardcover as well as the iBookstore. We have assumed the list prices to be: $26 for the hardcover, and $14.99 for the eBook on iBookstore on the iPad.

2. We have assumed that the new “agency model” will be used for all books sold on the iBookstore for split of revenue between Apple and the Publishers.

Note:  The “agency” model is based on the idea that the publisher is selling to the consumer and, therefore, setting the price, and any “agent”, which would usually be a retailer but wouldn’t have to be, that creates that sale would get a “commission” from the publisher for doing so.

The wholesale model, on the other hand, is when the publisher “sells” the book to an intermediary (i.e. Amazon, Borders, B&N) based on the publisher’s established retail price and a discount schedule, typically around 50 percent. Then the purchaser resells that e-book at whatever price they like. (Source: ZDNet)

(Pls note that the most important point about the agency model, is who “owns” the sales data – Apple or the Publisher. This is not very clear at this point. As you can imagine, this sales data is the core strength of Amazon at this point)

3. We have not considered any revenue/profit dilution due to piracy, since we assume that the Books in iBookstore would be ‘digitally locked’

4. Royalties used are as follows: approx. 6% is the royalty paid for a paperback, and for eBooks, royalties might be on the way up, but we dont know if this will be a trend. We have taken a 20% royalty on “net proceeds” – basically 20 percent of whatever the publisher receives from the retailer (in our case, this would be 70 percent of the list price on the iBookstore).

5. We have only considered the royalties for the author and not the “advance” because, by definition, this is an advance on future royalties.

6.  As expected, we’ll start everything from the list price. (For now, we’ll assume that the new model based on “actual amount received” by the publisher will not be used, and that royalties will continue to be a percentage of the list price).

7. This analysis ONLY considers sales through Apple’s iBookstore. We’ll assume that sales elsewhere will have no impact on our calculations (obviously wrong, but for now, we can go ahead. we’ll cover this particular assumption in a separate post).

Analysis Summary: The $14.99 price for eBook: Who gets what?

Economics behind iBookStore

Economics behind iBookStore

References:

We have used multiple sources of public information for this piece. The most significant ones are listed below.

1. Advances And Royalties: The Business End Of Writing – Susan B Pfeffer
2. Apple pitching its agency model to book publishers - ZDNet

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6 Comments »

  • www.rambhai.com said:

    The economics behind Apple’s iBookstore…

    One of our “must-do” posts has been this: To take a detailed look at the economics behind the iBookstore, in simple-to-understand examples….

  • Scott said:

    If direct sales from authors to readers was “the missing link,” authors should be lining up to ditch their publishers and make the big bucks, right? News flash: they’re not. In fact, many are aggressively and publically *defending* their publishers. For an example, go read Tobias Buckell’s post on the Amazon/Macmillan controversy. The authors understand that their publishers perform vitally important services beyond simply printing and marketing books: they select the wheat from the chaff of new submissions, they create the look and feel of the book, and they *edit*, which involves a lot more (as Tobias demonstrates) than just checking to make sure the spelling and punctuation is correct. Most writers acknowledge that they can’t do these things themselves, and they are more than happy to let the publishing professionals handle them – and, by the way, bear the up-front costs that are required before a book can see a *dime* of revenue – rather than contract out for these services themselves. (This is, by the way, a large part of why hardcovers are more expensive than paperbacks – the publishers are trying to recoup their production costs in the initial issue.) If we encourage writers to sell directly to authors via iBooks, what we end up with is essentialy the Apple-haters’ parodic idea of the App Store: full of the book equivalent of fart apps, with the gold difficult or impossible to find among the dross. Authors don’t want that, and I’m pretty sure readers don’t either.

  • junior said:

    Good points scott. I guess what we inferred, by the “missing link”, ignored these critical points about the role of the publisher, which, like you rightly mentioned, is much more than printing.

    But scott, is it possible to make an argument that technology is increasingly automating many of the functions that publishers do? For example, finding the gold – will technology not enable that, in some small ways?

  • Links for Writers | The Official Rodes Fishburne Hub said:

    [...] friends at IPTIAM take a look at the economics behind the iPad and Apple’s forthcoming electronic [...]

  • Jasmine Turner said:

    iPad is way too cool to own, i wanna buy one next month.:’.

  • chay32 said:

    iBooks is an amazing new way to download and read books on iPhone, iPad.

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