The economics behind Apple’s iBookstore

November 17, 2010 6:51 pm

[Reproduced with Permission from http://iptiam.com]

From the day of the iPad launch, we have been puzzled by Apple’s pricing decisions specific to the books listed on the iBookstore. One of our “must-do” posts has been this: To take a detailed look at the economics behind the iBookstore. Our analysis below.

1. For our analysis, we have taken the case of a book thats released in hardcover as well as the iBookstore. We have assumed the list prices to be: $26 for the hardcover, and $14.99 for the eBook on iBookstore on the iPad.

2. We have assumed that the new “agency model” will be used for all books sold on the iBookstore for split of revenue between Apple and the Publishers.

Note: The “agency” model is based on the idea that the publisher is selling to the consumer and, therefore, setting the price, and any “agent”, which would usually be a retailer but wouldn’t have to be, that creates that sale would get a “commission” from the publisher for doing so.

The wholesale model, on the other hand, is when the publisher “sells” the book to an intermediary (i.e. Amazon, Borders, B&N) based on the publisher’s established retail price and a discount schedule, typically around 50 percent. Then the purchaser resells that e-book at whatever price they like. (Source: ZDNet)

(Pls note that the most important point about the agency model, is who “owns” the sales data – Apple or the Publisher. This is not very clear at this point. As you can imagine, this sales data is the core strength of Amazon at this point)

3. We have not considered any revenue/profit dilution due to piracy, since we assume that the Books in iBookstore would be ‘digitally locked’

4. Royalties used are as follows: approx. 6% is the royalty paid for a paperback, and for eBooks, royalties might be on the way up, but we dont know if this will be a trend. We have taken a 20% royalty on “net proceeds” – basically 20 percent of whatever the publisher receives from the retailer (in our case, this would be 70 percent of the list price on the iBookstore).

5. We have only considered the royalties for the author and not the “advance” because, by definition, this is an advance on future royalties.

6. As expected, we’ll start everything from the list price. (For now, we’ll assume that the new model based on “actual amount received” by the publisher will not be used, and that royalties will continue to be a percentage of the list price).

7. This analysis ONLY considers sales through Apple’s iBookstore. We’ll assume that sales elsewhere will have no impact on our calculations (obviously wrong, but for now, we can go ahead. we’ll cover this particular assumption in a separate post).

Analysis Summary: The $14.99 price for eBook: Who gets what?

References:

We have used multiple sources of public information for this piece. The most significant ones are listed below.

1. Advances And Royalties: The Business End Of Writing – Susan B Pfeffer
2. Apple pitching its agency model to book publishers - ZDNet

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