Monday, February 01, 2010

Is The Digital Price Right?

When we buy a physical rendition we accept the costs associated with its production and distribution and we compensate this in the individual price we pay. A large Art book is bigger has better quality and weighs more than the paperback. Importantly we as consumers appreciate the difference in value we perceive between a ‘solid’ hardback and a ‘flimsy’ paperback and even though the content is identical, there is perceived value in the packaging and extra cost of storage and distribution due to its weight and volume. Importantly the ‘reader’ is free and the storage and distribution factored into the price of the book.

Today’s emerging digital book has a different cost model. Here the cost shifts to the platform to which the book is delivered and read. The cost is born by the consumer who has to buy the tin, pays for the network connection to facilitate its search, retrieval and download. They also have to buy the individual title. The publisher still pays money for their infrastructure but this is a one off capital investment and should not be tied to individual transactions. If he chooses to use an agent aggregator to distribute then these are effectively resellers and should justify their own costs based on the service they provide. Some would suggest that it costs relatively the same to aggregate 1 title as it does 1,000 and although cost increase with size this is not as significant as the initial one off investment.

At the other end of the value chain we must not forget the author and their royalty payment. Some would advocate digital rights are separate to physical both in their licence term and reward. It would be understandable if authors were getting a significant percentage of the sale but they aren’t.

So we come to the thorny issue of digital pricing. There is the common cost of acquisition and editorial between all manifestations of a work. The production costs are different and skewed heavily towards the physical copies. The sales and marketing are similar, but digital buy its nature, is aggregated and not as dispersed as physical. Digital marketing can also support both physical and digital. As the title should only move once it could be claimed that there is little distribution costs per unit or pack. There should be no cost of returns and certainly no cost of shipping returns.

There is a difference is cash flow as money doesn’t flow until after a consumer sale and the stock effectively viewed as being on consignment. No pro-forma required. The publisher is in full financial control of any reseller relationship if they stored and distributed on demand centrally. If distributed to aggregators then the money may flow retrospectively when the terms dictate, but the number of trading relationships is miniscule compared to the accounting relationships in the physical world.

So why are digital books being price aligned to the hardback? Some in the industry suggested not long ago that the hardback was no longer viable, was dead and should be discontinued. Although the consumer demand for the hardback may change, the consumer logic behind it is different to digital and we are in danger of mudding waters and even exposing the price of the same content in a hardback. Some would say that the hardback is a red herring and it is literally about negotiating the right digital price – interesting times. The irony is that the retailers who sell both digital and physical are on a win win ride.

So we come to what is a fair digital price and even price point. The costs and margins will differ between publishers but is not necessarily perceived that way by the public who buy their digital media at normalised price points. We must not forget that the consumer now has to make a sizable investment to buy digital books and the publisher has a sizable reduction and shift in their cost model. In both cases the shift is from individual cost of title towards a cost to play. Consumers are not idiots and the one salient lesson the music industry has taught everyone is that they resent being treated as such.

1 comment:

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