How Publishers Make Money by Losing Money: The Economics of Archaeology Publishing Part 2

Posted on September 8, 2014

3


In my first post on the economics of book publishing I mentioned that many mass medias have a long tail model, most books “lose” money but a few make lots of money. With all these losses you might be wondering how publishers stay in business?

The Art of Taxes

Books are physical stock and physical stock costs money to store in a warehouse:

  • Rent/upkeep of the building
  • Employees to look after them
  • Security to make sure they don’t get stolen

These costs are recurring and there comes a point when selling one or two books a year does not pay for the costs of keeping 100 copies around. Many publishers load this problem onto third parties- bookstores, Amazon, i.e. book sellers. However, these resellers demand steep discounts 30-40- even 50% off the retail price. That discount makes it very hard to break even or make a profit. Moreover, some sellers have deals where they can return the stock. One estimate is that 35% of books are returned. Amazon is ruthless with returns. Especially, once people start selling used copies of the book through them and they no longer need the publishers stock*.

When I say return I mean the resellers pulp the book**. It is too expensive to keep shipping them back and forth. If a publisher has stock themselves and a subsidiary in the US they donate the stock to charities sending the books to poor neighborhoods, libraries, or poor countries. They can then take that donation or pulped books- at fair market value of the books (if lawyer/accountant is good that can be a very high number)- as a tax deduction. Basically, they make up losses in the taxes they don’t pay.

The trick is of course to find the right time to declare this “loss”. Given enough time, most books will sell their first print run. However, with costs of holding stock there is a point when it is more financially lucrative to declare a book as a “loss” and make more money back from the tax breaks. That’s why a lot of books look like they lost money on spread sheets.

Money After the Loss

Declaring a loss minimizes the risk under the right circumstances but does not make money. To make money after a “loss” you bundle the digital book into a service. Take that $7100 archaeology book I discussed. You can go on WorldCat and look up which libraries have it- http://www.worldcat.org/title/encyclopedia-of-global-archaeology/oclc/870899596. Wow! 174 have it. Not really, I clicked on the first two libraries near me and it turns out they don’t have access to the book, there are some errors in WorldCat. However, I did click through to several libraries that did have access through a bundle deal with access to 10,000+ books online from Springer. That book may not sell a lot of copies at $7100 but it will make money from being bundled in with other books. Thanks to copyright law that might be for 100+ years, plenty of time to make back the money invested and then some. This is of course after they have deducted the “losses” from their taxes to breakeven/not lose money.

What This Means for Archaeology Publishing, Well All Publishing

This model of making money from mass licensing of books has huge implications for publishing. In case you have missed it Amazon and Big publishers are in a life and death struggle over book pricing.  Amazon, with its immense market clout, has set the price of ebooks at $9.99. As I mentioned before the cost of books does not come from printing, storage, etc. but from the costs of development — editing, formatting, etc. In some cases those development costs are over $9.99. This price will knock some types of books right out of the ebook market and cut margins to even lover levels. What’s worse is that option of declaring losses and making money up over years and decades through licensing is not available to many small and medium sized publishers:

  • They Can’t shift losses around to different countries to get the best tax break.
  • Small publishers don’t have the accountants and lawyers to help them declare “losses” correctly- no one wants to do to prison for taxes.
  • If they have five books that “lose” money and they only publish five books then deducting the loss from your taxes will not help you. It is just a loss.
  • License deals only work if you have big catalog. No one is going to bother licensing 20 books, especially if none of them are a must have.
  • They don’t have the income or technology ability to turn their catalog into a digital bundle

What gets a little less attention this is war is that the Publishing Industry is consolidating at pretty fast pace. There are now 5 main publishers that control 60-70% of the book market in the US and who are always merging.  Publishers have to consolidate to keep bargaining power and to take advantage of economics of scale. A deeper catalog means better licensing terms, higher profits from digital bundles, and the knowledge/finances to create digital bundles. Most mid-sized and many small publishers will go out of business or be swallowed up

Rise of the Indy and Self Publisher

On the other end of market self publishing will bloom thanks to ebooks and the ‘new’ easy of publishing. Amazon is aiming to really increase that market as it is a gold mine for them. They charge you download rates so they effectively get the books for free and take an additional 30-70% cut out of the sale, after deducting download costs. Even if a self-published author only sells one copy that is straight profit into Amazons pocket. Self-publishing becomes a numbers game in which a few people will make it big but the vast majority will not make any money. Though Amazon, or the other similar platforms, will make money either way. Essentially, they are driving the book publishers to merging into one or two super publishers, big enough to force amazon to charge decent rates, at least for that super publishers own books. Some small publishers and niche publishers will still be around but expect to see a polarized publishing book world.

The Affects

Archaeology publishing is a niche in Academic publishing. Books in archaeology are also tied up with publishers who do journal publishing. Elsevier with 2 Billion turnover is a third the size of general publishers. Still, journal publishers are consolidating for much of the same reason, the power that comes from deeper catalogs. Publishing is consolidating, might only be a few commercial archaeology publishers (3-4? 1-2?) in a decade or so, and that will have ramifications.

A few societies might still publish but even then their operations may have been taken over by the big publishers in all but name. Matt who has worked in publishing commented on my last post that print runs are actually down to 80-120 books. If Amazon convinces everyone that $9.99 is the max that should be spent on an ebook I don’t see many societies publishing books and breaking even by selling only 100 books.

A somewhat scary future is that all new books are priced outside the reach of most individuals and that Universities only subscribe to the books. High prices like the $7100 Archaeology book makes perfect economic sense:

  • You can’t claim $50 per book as a loss on your taxes when you were selling it for $10 . Publishers will make more money by claiming a loss at full price or close to it than a small piece of discounted profits. Imagine the tax breaks Springer will get for a loss on a $7100 book, well actually $5400 book $7100 with digital extras?
  • When they do bundle the digital version they need a higher price. Let’s say I come to you and say hey you can have this $30 book for only $10 a year. They do the math and realize it is a better deal to buy the book outright. But, I come to you with a $7100 or $5400 book and offer it to you for $10 a year you will take that deal right away.

It is possible that in the future no one owns archaeology books and we will be dependent on access to a University Library who have subscribed to a bundle of e-books. Take a look at those libraries in WorldCat that have access to that $7100 book. Many of those organizations don’t even have Archaeology programs or courses.

Of course there will be Open Access publishing and individual publishing as the alternative. For Archaeology it will be very interesting to see how this plays out. Will publishing through the individual become more acceptable? Or will it become a divide between those that did publish with the big 2 or 3 and those that did not? Will the lack of options of who to publish with decrease books sales? Will there be fewer archaeology books? Will books become less important?

What are your guesses for the future?
*Amazon has a great business in that they effectively use people as warehouses- they take on the storage and managing costs of the used books they sell. Amazon makes good money on their affiliates because Amazon does not shoulder the costs.
** Some of these “pulped” books end up on Amazon or at flea markets

 

 

Posted in: Uncategorized