The eBook Wars: The Price Battle (IV) — Value

It seems like every post is about value. Low-quality books have low price values. We all agree on that. The question unanswered, however, is what value does a book have regardless of its form? That is one tough question!

What brought this to mind was an article in The Economist titled “The Lowdown on Teardowns” (January 23, 2010, pp. 62-63), which was subtitled “Ripping apart smart-phones reveals their true cost.” I tried to rip apart a book to find its true cost but didn’t have any success. Unlike the smartphone, a book is primarily intangibles.

But the article is intriguing. Not because I haven’t read similar items before, but because it hadn’t dawned on me before how differently consumers value smartphones and books and clamor for pricing closer to cost in books but not in smartphones.

The Economist gave this figure for the Apple iPhone 3GS 16GB smartphone: $170.07 for parts and $6.50 for assembly costs, a total of $176.57. But you can’t buy the phone for that price, not even for anything close to that price. The article goes on to say that there are other less tangible costs such as research, design, marketing, and patent fees, along with Apple’s profit. But to get the iPhone, you either have to pay a very high price or sign on for telco service at an inflated price.

Where is the hue and cry for a $250 unlocked iPhone that will work on any network? Where is the hue and cry for lower telco costs (after all, the network has already been built and paid for)? Isn’t Apple overcharging by hundreds of dollars for a device that will be outdated within a few years, that breaks easily, and can’t flush a toilet? What is it about Apple that legitimizes the huge spread between actual cost and sales price?

Compare this to the hue and cry over a $12.99 or $24.99 ebook. Supposedly the ebook will last forever, after all it is simply bits and bytes. The iPhone will be outdated in a few years. eBooks have DRM that restrict their use; the iPhone is locked into a specific network. The ebook has design, research, and marketing costs, just as the iPhone. Similarly, the ebook has manufacturing costs just as the iPhone does.

Yet, consumers willingly pay more than $2000 to own and use an iPhone but grumble about paying more than $9.99 for an ebook. The difference must be that authors have little value but Steve Jobs has great value, otherwise the market valuation is irrational.

The argument is that the iPhone can do so much more so it is worth more. Accepting that as true doesn’t validate the irrationality of being willing to pay the iPhone price but being unwilling to pay the ebook price. The disparity in price between an ebook and iPhone already recognizes the single-function utility of the ebook versus the multifunction utility of the iPhone. There is much more at work here.

There is more at work here than meets the eye. I think that ebooks are suffering from two problems. First, although ebookers tend to disparage print books, what they are really doing is comparing the ebook to the pbook in a more wistful way. The iPhone’s comparable was a less functional smartphone/cell phone; the pbook is as functional as the ebook — or is it? On a book-by-book basis it is, but an avid reader usually has multiple books at hand and ebooks are certainly more portable than pbooks. What ebookers are really saying is that there is no cachet in ebooks and thus no value. (Interestingly, consumers continue to spend the asked for price for the ebook reading device, taking their price rage out on the ebook itself, not on the device.) 

Second, publishers have assumed that readers will see value in whatever the publisher thrusts on the market. Apple, on the other hand, recognizes that consumers need to be led by the nose and so creates a sense of value that the consumer can grasp. Publishers continue to fail to either demonstrate an ebook’s value or convince consumers that the ebook is at least as valuable as the pbook.

The conundrum is this: Publishers undercut their value argument when they print a paperback version that sells for one-third the price of the hardcover. How can publishers win the value argument when they undercut themselves? Publishers need to address this value perception problem.