How to Make a Little Money in Digital Publishing

The Wall Street Journal publishes some numbers from the few digital-only publishing houses and they are not comforting.

The big six book publishers are faced with fewer retail location now that Borders is closing stores and Barnes and Noble is devoting more selling space to merchandise and the Nook. But trying to run a publishing house on e-book sales alone is going to be tough.

All three houses Jeffrey Trachtenberg contacted claimed $1 million in sales this year or last. But Open Road, the start-up financed by $7 million of Jerry Kohlberg’s money, is already gasping for more. With a burn rate of nearly $5 million a year, it is no wonder that Kohlberg claims he’s closing another round of financing. Open Road really needs the money.

Looking at the numbers presented in the Journal’s article, you’ve got to wonder who’s dumb enough to put up cash here. Open Road is carrying huge expenses–19 employees, 13 of which are marketing in a medium with few natural marketing outlets (the bulk of the business takes place on Amazon)–but has only been able to muster $1 million in sales.

The article has Open Road claiming they’ll increase their sales to $10 million in 2011 but doesn’t offer much to justify that claim. The CEO says they sold 16,400 “downloads” one week last month but that only annualizes to a doubling of sales, not a 10-fold explosion. Let’s hope Kohlberg’s investors got a little more insight or, at least, better math.

Open Road claims 400,000 downloads since last May off 420 titles published. That’s fewer than 1,000 copies of each title sold if we’re averaging out the titles. So to get to 10 times the revenue, it would appear that Open Road is going to need 10 times the titles or 4200 new ebooks in the next year instead of the 2,000 they project in 2011.

Let’s put that number in perspective. Random House publishes somewhere around 2000 new titles a year in the US. The revenues they generate $1 billion in revenue worldwide. Even making some conservative assumptions, Open Road is hoping in their best-case scenario to generate 2% of the Random’s revenue (I’m lowballing the US number at $500m) from the same number of titles.

Yes. Digital publishing has a much lower cost of goods and cost of selling (though Open Road seems to be proving that wrong by spending $400,000 a month in overhead, god knows on what.) But the disparity between the two models suggest that being a digital publishing house is a non-starter.

It’s true that my calculations above are based upon average numbers. Publishing is a hit business. So there’s no such thing as an average title. Even publishing backlist titles as Open Road is mostly doing, the sales are going to be skewed to a few titles that sell well. A real big hit could make it easier for Open Road to open up the market and reach its target revenues.

In the old book business, you bought hits by buying big properties that came on the market. In the digital book business, you’ve got to hope that you find the next Amanda Hocking. How you predict that in advance, as Open Road is doing, is anybody’s guess.

The $10 million investors are being told that Open Road will make next year is probably not a random number. It’s just a product of what the company needs to try to keep a straight face. The way Open Road is paying authors, it would need to generate that much in sales just to yield the $5 million in needs to cover operating costs after the cost of sales. Open Road is paying authors 50% of what it receives from the publisher. If Open Road had $1 million in revenue over the past year, it kept only $500,000 against it’s $5m tab. Sales and margins will have to keep increasing to justify that kind of outlay.

Sadly, digital-only publishing isn’t a high margin business for publishers. With 400,000 downloads generating $1 million, Open Road is seeing a neat $2.5o per download. Since Open Road receives 70% of the selling price, the average title at Open Road is selling for less than $4.00. That means Open Road’s best sellers aren’t premium titles. The prestigious titles listed in the chart accompanying the story all sell for $7.50 or more.

For Open Road’s margins to expand, it will have to find the kind of must-read frontlist books that the traditional publishers are best at finding. Indeed, just last week Amanda Hocking decided that for the right up-front price, she would be happy to let St. Martin’s Press handle her publishing so she can concentrate on writing.

What Open Road hopes to concentrate upon to increase its revenue 10-fold in the coming year (and presumably some smaller multiple again the next year) remains a mystery.


Backlist E-Books Find an Audience
by Jeffrey A. Trachtenberg
Wall Street Journal; April 1, 2011

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