Why do ebooks cost so much?

According to a lawsuit filed Tuesday in a California federal court, it's because Apple has conspired with book publishers to keep prices high. In the complaint, lawyers for a group of consumers argue that "Apple struck deals with Hachette, HarperCollins, Macmillian, Penguin, and Simon & Schuster to switch to the Agency model for Apple's iBookstore." As a result of the alleged price fixing, say attorneys at Hagens Berman, the law firm representing the case, "prices of e-books have risen as much as 50%."

There can be little doubt that ebooks from major publishers have gone up in price. Where Amazon's Kindle bookstore initially sold many bestsellers at prices of $7.99 to $9.99, a glance at the Kindle store's New York Times Bestsellers list reveals typical prices of $12.99 to $14.99 today, with a relative few falling below the $10 mark.

In the legal filing for the price-fixing case, lawyers argue that Apple knowingly worked to undermine Amazon's low ebook prices, citing a now-famous interview between Apple CEO Steve Jobs and Wall Street Journal technology journalist Walt Mossberg. In that interview, which appeared online, in print, and in video from the January 2010 iPad launch event, Jobs told Mossberg "The prices will be the same ... Publishers are actually withholding their books from Amazon, because they're not happy with it."

Whether Steve Jobs' statement actually reveals Apple's involvement in a scheme to fix ebook prices remains to be seen, but it certainly appears to have foreshadowed the trajectory of later prices. And even if it turns out that price fixing did occur, that still may not fully explain why ebooks--which are bits and bytes--cost about as much as their paper-based counterparts.

To many readers, even Amazon's early $9.99 price seemed unduly high for a 2-MB text file. Without the overhead of paper, printing, packaging, shipping, storage, and retail display, the profit margin on ebooks must be pretty darned high, right? As ebooks have grown in popularity, a number of publishing professionals have stepped up to try to answer this question.

On his blog, publisher Michael Hyatt, chairman of Thomas Nelson Publishers, argued that ebook prices do include a significant discount, saying that $9.99 "is already roughly half the price (depending on the format) of the typical physical book."

Of course, that $9.99 price doesn't include any actual printed material, and incurs minimal delivery costs. But Hyatt argued against that view. "Some people assume that these two items represent the bulk of a book's costs. They don't. Together, they account for about 12% of a physical book's retail price. So eliminating these costs doesn't do much to reduce the overall cost structure."

Meanwhile, according to Hyatt, ebooks incur new costs for publishers that paper books don't. Digital preparation, quality assurance on each of the digital formats, and digital distribution require workers and time in their own right. "The good news is that we are making about the same margins," said Hyatt, "regardless of whether we sell the book in physical form or digital."

Digital rights management (DRM) software and credit card payments take a chunk out of the book price, as well. Apparently these two factors, taken together, can account for between 6% and 11% of the price of a book.

Business journalist Robert Levine makes similar economic arguments in his forthcoming book, Free Ride: How Digital Parasites are Destroying the Culture Business, and How the Culture Business Can Fight Back. According to Levine, the cost for publishers to print and distribute a hardcover book adds up to a mere $3.50 per copy.

These figures cast some doubt on the notion that current-day ebook prices are the result of nefarious dealings between Apple and book publishers. It may well be that the business model of the big publishing houses demands high per-unit sale prices. In all likelihood, the public will get a clearer view of the economics of ebook publishing as the price-fixing case proceeds.

Ultimately, there can be little doubt that consumers think books cost too much. But not all books. For companies looking to take their own publications to market, ebook publishing can represent a significant cost savings when compared with more traditional routes such as small presses and "vanity" custom publishers. Because Amazon charges nothing to host your book, taking a publication to market adds no cost above what a business would incur during the initial writing and editing of the text, while Amazon passes 70% of the sale price on to the publisher through Kindle Direct Publishing.

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