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Why eBooks and Digital Albums Cost So Much
I often comes across comments relating to the costs of eBooks and digital albums versus physical books and CDs. Many people feels that digital should be cheaper than physical because there aren't any costs like manufacturing, storage, distribution, returns, etc. The assumption is that these costs are a major part of the price of a product. I've seen more "realistic" prices set for ebooks at around $1.99-$2.99 and $3.99-$4.99 for MP3 albums. But this assumption is incorrect. The costs of creating a physical versus digital product isn't significantly higher. Prices under $5 may be great for the consumer but would they be enough to keep publishers and record labels in business?
I've noticed that eBooks often are cheaper than physical. I purchased two recently. I paid $9.99 for the Kindle version of Hitchcock and Philosophy: Dial M for Metaphysics. The paperback is $15. I paid $2.89 for The Galapagos Murder: The Murder Mystery That Rocked the Equator from KoboBooks. The paperback version on Amazon is $6.74.
Michael Hyatt, the former CEO of publisher Thomas Nelson, wrote a 2010 article called "Why Do eBooks Cost So Much? (A Publisher’s Perspective)" that explains why the costs of physical and digital are similar. He says manufacturing and distribution are about 12% of the cost of a book.
"Publishers still have to pay for acquisitions, royalties, editorial development, copyediting, cover and interior design, page composition, cataloging, sales, marketing, publicity, merchandising (yes, even in a digital world), credit, collections, accounting, legal, tax, and the all the usual costs associated with running a publishing house."
He also points out that there are costs associated with creating digital files: digital preparation, quality assurance and digital distribution. He explains that QA is a very time consuming process. Files have to render correctly in the various eBook file formats.
"When you add epigraphs, pull quotes, tables, charts, graphs, illustrations, footnotes, etc., it quickly becomes complicated...At Thomas Nelson, we have seven full-time people managing this process, and we’re currently looking for three more."
A 2011 article "Who Really Profits from Your iTunes Downloads?" from Investing Answers gives the break down for an album purchase. A $9.99 download on iTunes pays about 94 cents to the artist. A band must split this amount. Not only does this have to cover their income taxes and living expenses but often payments to any staff they have as well. The record company makes $5.35.
"Record companies get a cut of absolutely everything a musician produces. That's not too surprising, considering artists are a risky investment the record company is taking a chance on. They pay advances to the artists for recording costs and other expenses, but they expect a return on that investment."
Only about 10% of artists on major labels are profitable. The record labels have to sign and attempt to break new artists and depend on moneymaking artists to cover that cost. They also have to fund the creation of albums with no way of knowing whether they'll be flops or major hits. Lots of people have to be paid including producers, studio engineers, songwriters and session musicians. Labels must also pay for office space, utilities, secretaries, graphic designers, accountants, lawyers, janitors, etc. Albums have to be promoted and advertised to the public, and distributed to various retailers. Singles have to be promoted and distributed to radio.
Apple keeps the remaining $3.70 from each sale. Needless to say Apple has to pay lots of people to keep iTunes up and running and make a profit. When you consider all the expenses involved $3.99-$4.99 digital albums may be an unrealistic price unless lower prices happened to double sales. Only 47 cents would go to the artist, a label would make $2.68 and $1.60 would go to digital distributors like Apple.
While digital albums often do go on sale for $4.99 on Amazon, it may not be enough to keep artists, labels and distributors like iTunes in business. And it would be even harder for indie labels to survive. While 94 cents is good money for the few artists who can sell hundreds of thousands to millions of albums, it wouldn't pay a living wage to the majority.
"So how do artists survive in this industry? While music sales are part of the equation, they aren’t the only ways these artists are paid for their songs. The real money for musicians lies in touring. Many musicians put up with the exhausting pace of life on the road because touring can be much more profitable than music sales."
When you take into account overhead and all the people that have to be paid to create your favorite books and albums, perhaps prices under $5 aren't realistic. Just because digital files don't seem like "real things" doesn't mean there aren't lots of costs that go into creating them. Increased sales may not make up for such steep price declines.
Of course, there's also the argument that if publishers and record labels were taken out of the picture, music and books would be much cheaper for the consumer. That's a whole other argument and something that probably won't happen anytime soon due to the difficulty of independent artists and authors trying to reach wide audiences.