Why the Ebook Bubble isn’t going to Burst

I hear a consistent rattle throughout the blogosphere about how we are in an ebook bubble. And of course we all know that bubbles are bad. They lead to financial collapse and ruin. And that is exactly what’s going to happen to ebooks, any day now.

I don’t personally believe we are in an ebook bubble, but even if we are, I don’t think it’s likely to collapse any time soon.

Let’s start by looking at what a bubble economy actually is, how it applies to ebooks and what an ebook bubble collapse would look like.

An Economic Bubble

First lets start with a bubble economy. An economic bubble occurs when the perceived or market value of an item or industry is too different from its real or intrinsic value. This can easily be explained with a couple of examples.

The dot com boom and bust of the nineties was a classic economic bubble at work. What happened is this: In the early nineties everyone was convinced that ecommerce was going to be the next big thing. (They were right, of course.) The stock market began investing heavily in any and all internet businesses.

The problem was the industry was still relatively small and the companies were new and untried. Internet businesses are lean by nature and in the mid-nineties there were hundreds of them. Most had a modest office space somewhere in California, a half dozen employees and a handful of web servers. That didn’t stop investors from sinking millions into them.

The result was a classic bubble. Some of these companies could measure their real assets in thousands or tens of thousands of dollars. On the stock exchange they were worth millions.

bubble economy

What happens when a company has fifty thousand in real assets and an estimated worth of fifty million? When it’s an economic boon, like the early and mid nineties were, all is good. But as soon a recession hits, look out. Many of the companies didn’t have assets on hand to weather the storm and went bankrupt, leaving investors out millions.

Another classic bubble is housing bust of 2008. For years real estate values rose consistently. Many people discovered real estate as a good investment tool.

But what about the real value of your house? Every year your market value goes up, but does your house grow bigger? Does it get better? If anything it is slowly aging, being subject to depreciation.

Again, as long as the economy is fairly stable, it works. But eventually the economy takes a downturn. Then nobody wants, or can afford, to pay the current market price. The last housing bubble left many people owing more on their current mortgage than they could get from selling the house. They were underwater, as the saying goes.

The Ebook Bubble

Are we in an ebook bubble? That’s a pretty murky question. With the dot com bust of the nineties it was pretty obvious. Companies have a tangential amount of fixed assets. The DOW lists stock prices. Just do the math and you’ll know. The housing bubble was a little tougher to see. Market value on a house is really just a guestimate of what the house would sell for. You don’t know exactly what the house’s market value is until you actually sell it. As many found out in the housing bust, sometimes houses won’t sell at their appraised value.

To figure out if we are in an ebook bubble or not we have to answer two questions. What is the real, intrinsic value of an ebook? What is the market value of an ebook? Neither of these questions have a good objective answer.

Market value of books

Those sounding the alarm about the ebook bubble are often the same people concerned about the huge rise in cheap or free ebooks flooding the market. These books are rapidly driving out better written but more expensive books, or so they claim.

This whole notion is based on a couple of simplistic half truths. The first is that books are an interchangeable commodity, that consumers simply looking for a book (any book will do) to read will naturally buy the cheapest they can find and be done with it. The second is that book sales are a zero sum game, that more sales of book A invariably means less sales of book B.

It is sometimes true that a book consumer is simply looking for a book to read to pass the time. It’s also true that people can only read so many books in any given period and eventually their book buying becomes saturated.

But neither of these paint the true story of a book’s market value. Books are not interchangeable commodities. Readers might be price sensitive on some titles but willing to pay more for other titles. A few books might compete for the same readership, but most do not. Some of the best marketers out there simply shrug their shoulders and say, “you just can’t predict the market.”

Here is the secret: each book is unique. You are trying to define a market value for “books” but each book has it’s own market value. Some books will sell well even at a premium price. Some books won’t sell, even at ninety nine cents. Some are free and still don’t get many downloads.

You can make some guesses how much the market will pay for a given book by looking at the track record of the authors. Best selling authors bring in more sales than unknown authors, generally speaking. You can make an even broader guess based on the genre the book is in. But putting an exact market value on a book is almost impossible, because each book will have it’s own unique value.

Industry analyst have looked at sales for a huge number of titles and identified “sweet spots.” (Currently Mark Coker says 3.99 is the sweet spot.) Books often sell fewer copies if priced too high or too low. Some indies have identified their own personal sweet spot by bumping their price around until they find it.

The ebook bubble concept is based on the idea that since so many indie authors are willing to sell books for 99 cents, that’s the market value for books. But many titles sell well for higher prices, and many 99 cent books don’t sell despite the price. But for the sake of argument lets take the basement discount price as market value and go on.

The intrinsic value of an ebook

If you think measuring the market value of a book is hard, measuring its intrinsic value is even harder, in part because there are a number of different perspectives.

The consumer perspective: It’s often hard to get the average consumer to see any intrinsic value in an ebook. It’s a digital rather than real product. To them it’s a few bytes of information on their kindle, computer or device. It costs nothing to store there. It can be copied at the click of a mouse. This explains, no doubt, why so many people are so cavalier about epiracy.

The indie perspective: the ebook itself might not be more than a few bytes on a computer, but there were real tangible costs to creating it. There was editing that had to paid for, cover design, formatting, etc. These fixed costs are a easily tabulated and often seen as the real cost of a digital book. Because these are one time costs, they diminish with sales. Let’s say for example that it costs you a thousand dollars to produce an ebook. If you sell two copies, it cost you five hundred dollars per copy. But if sell a thousand copies, it’s only a dollar per copy. This is the mentality that makes it logical to sell books at 99 cents or 1.99, hoping to sell thousands of copies and recoup the cost of production and then some.

The publisher’s perspective has to add in further costs, the cost of doing business. They not only have to pay back the one time costs of producing a book, they have ongoing overhead they have to cover as well.

Indie writers have accused publishers of conspiring to keep ebook prices high to protect print sales. Indies often shake their head at the seemingly boneheaded things that publishers do, at least when seen from an indie perspective. In my opinion it’s about more than protecting print sales, it’s about paying overhead.

In almost every industry the single biggest overhead expense is payroll. And suddenly keeping profit margins high makes perfect sense. If you assume that the majority of people working in the publishing industry would like to keep their jobs, and their jobs are dependent on the company making enough profit to pay its overhead, the whole issue takes on a different tone. A lot of choices that seem dumb to indies makes a certain sense.

(I hate to be a doomsayer, but this is one of the main reasons I’ve stayed indie so far. I am not sure the big publishers will ever be able to compete effectively against an indie writer who has little or no overhead.)

But what about the writer’s time?

The ebook-bubble-is-about-to-burst crowd seems to overlap extensively with the what-about- the-writer’s-time crowd and the two are integral to each other. None of these costs have taken into account the enormous amount of time an author puts into writing a book.

This criticism is often laid at the consumer’s feet. Consumers who are supposedly willing to read any old crap they can get for 99 cents while bypassing on real literature.

Criticizing readers for reading what they like, be it for 99 cents or 9.99 is never a good way to sell them on your books. And since every author would like more sales than they get, it’s easy to read sour grapes into this.

The second place this criticism often gets laid is at the feet of Indies. If there weren’t so many hobby writers willing to sell their poorly edited manuscripts for a song, serious writers would have an easier time making a living.

This crowd rarely seems to lay this same criticism at publisher’s feet, though they used to. This was a common complaint heard in writers groups before the ebook revolution came along. If you figured out what the average advance meant in hourly wages, it was a pittance at best.

The truth is nobody has ever paid writers for their time. Most indies today look at this from an entrepreneur’s perspective. You can’t expect the consumer to pay you for bringing a product to the market. You simply have to sell that product at a profit so you can eventually recoup those costs. Others argue they enjoy writing and don’t need compensation for that time.

But, for the sake of argument, let’s factor in the time spent writing the book. If we allot even minimum wage to the writer during these long hours, the real cost of a book becomes tremendous. Suddenly we have a huge ebook bubble.

The ebook bubble

If we assume that the lowest price point is the “market value” of an ebook and we assume that writers must be paid at least minimum wage for every hour they spent laboring, the cost of an ebook and the market value are far apart. But do you notice something strange about this bubble?

bubble economy 2

The ebook bubble is inverted. The market value is lower than the real value. What happens when it costs more to bring a product to the market then a company can sell that product for? They stop making the product. Then one of two things happen, the market price rises until it again becomes profitable to produce the product. Or the product itself disappears from the marketplace.

Since the primary cost that makes this a bubble is the writers’ wanting compensated for his/her time, the only way for this bubble to burst is for writers, en masse, to stop writing. If that happens (and assuming that all the already in print books get read, out of print, or something…) there will become a shortage of books, the market value will rise and it again be profitable for some writers to write books.

There are so many problems with this that I am almost don’t know where to begin. But let’s begin with what I call the stand off. Every time I read something about the ebook bubble, the deluge of ebooks on the market or the race to the bottom, it’s from a writer. They are engaged in a disingenuous stand off with their fellow writers. If only all those other writers stopped writing and publishing books, my book would stand a better chance.

  1. A) I don’t believe that’s how it works. If prolific romance writers like Barbara Freethy or H. M. Ward were to retire their keyboards today, those readers wouldn’t flock to your literary novel instead. B) I’ll stop writing when you do. The hypocrisy of writers telling other writers to stop writing is too much for me to bear.

Then there’s the fact that writers have many complex reasons for writing. Many write because they love it. If they make money from their writing, great. If they don’t, they’ll still write. Some writers write because they have a message they want to share with the world. All reasons for writing are valid, not just the profit motive.

Besides, despite all of these things, many writers do end up making money. Many writers have supported themselves for years on novel sales. Some have even gotten rich off them. Amidst all the dire news about publishing today, there are good indications that the number of authors making a living from their books is actually at an all time high. I’ve said before that the real indie revolution isn’t the occasional break away best seller. It isn’t the meager amount the average writer makes. Its the growing number of midlist authors that are quietly making a living from their writing, and making far more than they did with a publisher.

How can authors get compensated for their time?

Are authors just supposed to slave away for years, for free, in the hopes of eventual rewards? Sort of. Here are some hints to help with time compensation issue.

  1. Approach writing as though it were research and development for your business. Companies don’t expect consumers to pay them for research. They underwrite those costs themselves and then hope to make that money back when they bring the product to market. Writers should look at their writing time the same way.
  2. You don’t have to race to the bottom. Book sales are about a lot of things, price is only one. If 99 cents or 2.99 price points offend you, price your book higher. Expect that you will have to convince people your book is worth more.
  3. Ask yourself, what else would I be doing? If there is a good answer, consider doing that and not writing. Nobody is forcing you to be a writer. If it’s that frustrating, instead of railing against other writers, just stop. Start a youtube channel. Paint a picture. There are hundreds of ways to be creative.

Most writers will realize, if they stop to think about it, that they want to write. That they would keep right on writing, even if they never got paid. So keep writing. Be glad you get paid what you do.

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