Sunday, August 14, 2011

What's a Book Worth?

Imagine you're an author of a book that was published a few years ago, but you've retained ebook rights. Someone wants to be able to give away digital copies of the book for free to an unlimited number of readers. What sort of fee should you demand? After all, if everyone can get your book for free, they probably won't be buying the ebook anymore, and though some people might still want to buy a print copy, chances are there won't be a lot of them.

This is the central question that I've been asked over and over again when I explain the concept behind Gluejar's forthcoming ungluing ebooks service. How much is it going to cost to unglue a book?

A book industry veteran told me that when publishers sell backlist titles to other publishers, the rule of thumb is to pay twice the previous year's net sales for a backlist title. That seems like a good deal to me. If a book that sold at $15 wholesale was selling 1000 copies per year, a publisher should expect to pay $30,000 to acquire the title (and the associated revenue stream).

But I'm the type that has to understand where these simple-sounding rules come from. In an environment where everything is changing, it's worth understanding whether "rules of thumb" still have hands to attach to.

Here's another thing to imagine. Suppose someone offered to pay you $1000 per year, forever. What would you pay that person in exchange for that (reliable) promise?

If you are not a mathematician or a banker, you might suppose that no amount of money could secure such a great deal. A revenue stream that lasts forever should have infinite value, shouldn't it? It is my duty to tell you that if you thought that, you would be wrong, and the bankers and their mathematicians would be right. In fact, you can easily purchase such a revenue stream. It is called a US Treasury Bond.

For the current discussion, I will ignore the odd fact that the securities markets have for the past few days responded to Standard & Poors' downgrade of US Treasury obligations by making the same obligations more valuable. That says a lot about both Standard & Poors and US Treasury Bonds, but it says nothing about selling books.

New World Disorder, by Stephen Barnwell
Today, you can buy a 30 year treasury bond that pays interest of 3.54%. That means that you can pay $28249 for an investment that pays you $1000 a year for 30 years, and then returns your $28,249 to you. If you want a AAA investment that does the same over a hundred year term, you can buy 100 year MIT bonds at a lower price.

Owning rights to a book that pays you $1000 this year is not nearly as good a deal as owning a treasury bond that pays the same. That's because most books sell fewer copies year after year. Let's suppose that a book's sales decline 30% per year. Then the total revenue from that book will be

R = $1000(1+ 0.7 + 0.72 + 0.73 + 0.74 + 0.75+ ...)

continued to infinity. Here's where math comes in. That infinite sum is equal to a simple ratio:

R = $1000/(1 - 0.7) = $3333

But you'd do better putting the $3333 into T-bills, because very few books have the same sales year after year. If the T-bill interest rate is r and the sales decline is d, then  the value of the book's revenue stream is

R= $1000/(1 - r - d ) 

Finally, it's important to note that revenue is not the same as profit. If a book wholesales for $15, a publisher probably keeps only half that as margin. So if the publisher's margin is m, and this years net sales is N, the revenue stream is worth N * m *(1/(1-r-d)). So, for  
m = 50%
r = 70%
d = 3.54%
the revenue stream is worth 1.89 times net sales. Those thumb guys weren't so far off!

Many authors will look at these calculations with some skepticism. What if a book is discovered by Oprah and becomes an overnight success? There are some things to keep in mind. First, Oprah isn't doing her show any more. If you think of owning a book as a lottery ticket, there are two more things to think about:
  1. You can take cash and buy real lottery tickets
  2. there might be ways to improve the lottery odds of a book. Giving your book to a million people for free, might greatly increase the value of your next book if they love the first. Just hang on to the movie rights!
It's hard to know how rapidly book sales decline. I expect it varies from genre to genre. No one knows how changes in the book industry will effect individual book sales either; I'll write about that in my next post. But the numbers indicate to me that there's plenty of room for new ways for authors realize what their books are worth.
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  1. This comment has been removed by the author.

  2. Eric Flint found that when he gave away eBooks, his hardcopy sales increased.

  3. Eager to watch this develop, Eric. My wife is an IP lawyer and has worked on the process of creating securities from revenues derived from intellectual property, which another way of partly describing what you're doing. The so-called Bowie bond, where David Bowie sold bonds against his music publishing revenue is the best known example of this, although I believe the Weinstein's bought themselves out of Miramax by selling bonds against the fairly predictable revenue from their Dimension Films catalog.

    There are all kinds of individual complexities here of course, but I expect you'll be addressing those in due course...

  4. Perhaps book sales should adopt a new model as explained in Chris Anderson's view of FREE ? In Rainbows, the Radiohead music album (not a book, but a music album with value nonetheless) was released to those that gave it a value they thought it was worth. Name your own price. That value could range from being worth $0 to whatever a buyer thought it was worth. Radiohead made more money on digital downloads with the name-your-price experiment than the total take of all formats (including physical CD's) of the previous record!