The true price of publishing

When you shell out £25 or £30 for a hardback, what exactly are you paying for? I have always assumed – like, I imagine, most people – that the high cost of hardbacks is down to the fact that they are much more expensive than paperbacks to produce. But in fact this isn't the case at all. They are more expensive, true, but only slightly more – certainly not nearly enough to account for the £10 or £15 difference that has traditionally existed between the two formats.

In his forthcoming book Free Ride: How Digital Parasites Are Destroying the Culture Business and How the Culture Business Can Fight Back, the American author Robert Levine has an excellent chapter on publishing in which he interrogates the forces driving the pricing of books, in both their paper and digital forms. And some of the explanations he gives are (to me at least) surprising. For example, it turns out that "publishers only spend $3.50 to print and distribute a hardback". (Let's say it's £3 in Britain.) So when, this autumn, you go into your local bookshop and spend £30 on that gorgeous copy of Claire Tomalin's long-awaited Dickens biography, you really are just putting a large amount of profit into the hands of her publisher, with some knocked off for the retailer. Right?

Well, yes and no. If you think of books primarily as physical objects, then off course they'll seem a rip-off, because printing and distributing them is cheap. But as Levine points out, what you're really paying for when you buy a book is something different. You are buying the "text itself". And why is that so expensive? Because the publisher will, in many cases, have paid the author a considerable sum for the right to sell it. And because that same publisher will also (if they're any good) have ploughed considerable further resources into editing and marketing it.

In other words, publishing is a business that incurs high fixed costs. And it's this, to return to my initial question, that accounts for the high price of (indeed the very existence of) hardbacks. The publisher needs to maximise revenues in order to defray its outlay. Some people are prepared to pay top dollar to have the premium product – a hardcover copy that comes out, crucially, months before other versions. So it makes sense for the publisher to offer it to them.

Questions of this sort have become especially pertinent recently, of course, with the arrival of an entirely new publishing format: the ebook. Most people instinctively feel that ebooks should be substantially cheaper than paper books, because an ebook is not physically "made": there are no printing costs. But if, says Levine, the real value of a book resides in the "text itself", then the delivery method shouldn't much matter. The fixed costs – acquiring, editing, marketing – remain unchanged.

This, in a nutshell, is the argument that publishers have been having with Amazon for the last couple of years. When they first started selling ebooks, publishers argued that they should cost pretty much the same as physical books, and tried to set prices accordingly. Amazon, though, has always been in the business of driving prices down, and sought to sell them as cheaply as possible in order to gain as large as possible a share of the ebook market. In their efforts to drive prices down, Amazon has been hugely assisted (Levine points out) by the fact that they also manufacture the most popular ebook reader. Because Amazon makes big profits from its Kindle, it doesn't need to bother about making profits from its ebook sales. Indeed, if it sells ebooks at a loss, it may still be better off overall, because this will drive up sales of its Kindle.

Last year, Levine suggests, that's exactly what Amazon started doing in the US - selling e-books at a loss to drive up Kindle sales. Following a series of high-profile wrangles, publishers clawed back a bit of ground when they forced the retailer to adopt a selling system, known as the agency model, under which they, and not Amazon, could set the prices for ebooks. But one of the upshots is that publishers have now firmly accepted the principle that ebooks should be cheaper than their physical counterparts. The "text itself" does seem to have a different value according to the format it is delivered on.

It's still early days in the ebook story, and no doubt there'll be many disputes and disruptions along these lines in the future. But here's a final thought for now. Was it wise to allow a situation in which a single company – Amazon – became market leader in terms of both a digital product (the ebook) and the hardware through which it's delivered?