Kinds of costs
Chapter 3 offered some indication of the financial risk involved in the decision to publish a book. Publishing is a highly risky business requiring a large outlay of capital long before the book is ready to be sold, sometimes even before the author has set the first word to paper. And this outlay of front money continues all through the editing, design, production, and marketing processes. The entire cost of producing books must be carefully predicted and constantly monitored so that the eventual price is enough to give publishers some return on their investment and thus enable them to stay in business – but not so high that customers will refuse to purchase the books. In short, publishing is a high-level balancing act worthy of the Flying Wallendas.
Although different authorities may use slightly different terminology in discussing the costs incurred in publishing a book, most agree that there are four broad factors that eventually determine what the cover price will be. These are overhead, royalties, sales costs, and production costs.
- Overhead is a fixed cost in any business; it can be defined as all the general costs of running the business other than costs for materials and production. Examples of a publisher’s overhead are salaries and employee benefits, rent, office supplies and equipment, telephones and other communication equipment, postage, and interest on outstanding debts. As a fixed cost, overhead is integral to the cost of publishing a book and is a major factor in establishing a given book’s final price.
- Royalties are a second major cost for the publisher. When a publisher signs a contract with an author, a stipulated percentage for the book’s income is agreed upon as payment for the author. In many cases, particularly in trade publishing, a cash payment called an advance against royalties or advance for short – is paid to the author upon signing a contract and before any writing has actually been done. For instance, suppose author X contracts with publisher Y to write a book. Under the terms of the contract, X will be paid a $4,000 advance and royalties at 10 percent of the retail price of the book for the first 2,000 copies sold, 12.5 percent for the next 2,000 copies sold, and 15 percent for any additional copies sold. If the price of the book is $20, the author will earn $2.00 on each of the first 2,000 copies, $2.50 on the next 2,000, and $3 on copies sold thereafter. The author will not receive any royalty payments until sales exceed the 2,000 mark; $2 per book x 2,000 copies - $4,000, the amount of the advance against royalty. An author who fails to produce an acceptable manuscript - or a manuscript period is usually obligated to return the advance to the publisher. Royalties, then, are a variable cost in publishing because the amount paid is determined by the number of copies sold.
- Sales/Marketing costs usually consist of commission, catalog advertising and marketing, exhibit fees, travel, and other such expenses.
- Production costs make up the final cost area for the publisher. They include all the costs of producing a finished book from the author’s manuscript. Part of this production cost is fixed or predictable, part is dependent on the number of units produced. The fixed cost of production is usually referred to as plant cost, which include such things as composition (typesetting or its more modern equivalents), design and artwork, copyediting, proofreading, illustration, and other color separations. Plant costs are one-time costs; once the book is designed, it is designed; once type is set, it’s set; and so on, no matter how many times the book may go back for reprinting. Other production costs are not fixed costs, but are variable costs.
The variable costs involved in production are usually referred to as manufacturing or running costs and encompass expenses such as paper, printing, and binding. They are variable because they depend on the number of copies of the book that are ultimately printed. It is self-evident that it takes more paper, more ink, and more binding material, as well as more labor and time running costly machinery, to produce 10,000 books than it does to produce 1,000 copies.
The publisher can be fairly sure of fixed costs such as overhead and plant costs. But since variable costs are not so easily predicted, certain other decisions must be made before arriving at a book’s price. These decisions include such things as the kind of paper that will be used; cover materials; the type of binding the book will have; whether or not to use color besides black; and ultimately, the number of copies in the first print run.
All of these decisions affect not only the cost of producing a book but also how it will look. However, appearance is not a major factor to all publishers. For example, publishers like Viking, Knopf, and Farrar, Strauss and Giroux generally produce handsome books printed on high-quality paper, whereas other major trade publishers have books with sleazy covers that appear to be printed on paper that has been (badly) recycled out of old newspapers. (The latter publishers also tend to use poor-quality glue in their bindings, which gives rise to librarians’ well-founded lament that “the book fell apart after two circulations!”)
A good production supervisor not only will choose the most appropriate paper but also will buy as much of that paper as possible at one time to use for other books on the publisher’s list in order to realize substantial cost savings. A number of other factors come into play here, however. If the book needs color photographs or other illustrations, the paper chosen must have a glossy finish, and glossy paper costs more than the paper used for nonillustrated fiction books, which are usually printed on rough or antique-finish paper.
The color of the paper itself is a factor; “white” paper ranges from pure, brilliant white to a yellowish or muddy gray tone; the higher the whiteness rating, the more costly the paper. Weight is another consideration: a 700-page fiction saga will of necessity be printed on less bulky paper than a slim volume of poetry, for example. Finally, an important question to librarians especially is whether the paper is acid-free. Acid-free paper will last for many years without yellowing or crumbling, but it is also relatively expensive.
There are two general types of binding that hold the book’s pages together: sewn, or edition binding and perfect binding, or binding that uses glue rather than sewing to hold the pages together. Sewn binding is very sturdy; it is also very expensive compared to perfect binding. One form of sewn binding, called Smyth sewn, allows a book to open flat; another form, side sewn, does not. Both are superior to perfect binding, however, which was once used only for paperbacks and other inexpensive books, but is now used by many publishers for general hardcovers. (These are the books mentioned above in which pages or sometimes whole signatures fall out after a circulation or two.)
Once the pages are bound, covers are attached to protect the pages to allow the book to stand upright on a shelf and to add to the aesthetic quality of the book. The cover’s base is usually heavy cardboard (called binder’s board) covered with cloth, paper, a combination of the two, or a plastic coating. Cloth is certainly the most attractive, and most durable, but it costs more than paper or coated plastic. (A few publishers over the years have experimented with replacing binder’s board with a heavy gauge, printed plastic cover, but for some reason this never caught on.)
A number of factors affect the critical decision of how many copies should be printed:
- Is the author well known enough to sell a lot of copies on the strength of his or her name alone?
- Is the book’s topic of general or timely interest, or of limited interest?
- Is the book likely to sell enough copies upon publication to earn an immediate profit, or is it more likely to become a backlist title and thus take a longer time to establish an acceptable profit?
- How will the book be promoted and marketed?
- Have any subsidiary rights been sold, especially to movies and television, book clubs, and paperback houses?
To see how it all works, let’s imagine what happens in a typical (but imaginary) publishing house.
Simon Simple, the owner of Simple Publishing Company, has a manuscript for a novel that he believes will make a salable book. Its author has had several other titles published by Simple Publishing, all of which sold respectably, if not spectacularly – from 6,000 to 8,000 copies each. Mr. Simple believes that with a little extra push from the promotion and marketing people, this new novel, The French Wench, should be able to sell at least 10,000 copies. Not only does the author have a loyal following – her novels offer just enough titillation to keep readers coming back for more – but also two of her earlier novels sold for modest amounts to paperback reprint houses. The editorial staff agrees, so the production supervisor is asked to come up with an estimate of plant and manufacturing costs.
Simple’s profit (loss) on The French wench
With this information at hand, it is possible to project how well or how poorly Simple Publishing will do on The French Wench. If the publisher sells all 10,000 copies, or sells only half that number, the profit/loss will look something like that in the table below.
Profit (Loss table)
|Per copy||Total 10,000 copies||Total 5,000 copies|
|Revenue at 48% discount||$9.85||$98,500||$49,250|
|Less overhead of 40%||($3.94)||($39,400)||($39,400)|
|Less production cost||($3.10)||($31,000)||($22,500)|
If 10,000 copies sell, Simple Publishing will realize a profit of $9,200, plus half of whatever accrues from the paperback reprint contractual agreement (the other half going to the author) made with another publisher. If a fickle public decrees that the book isn’t so great after all and buys only 5,000 copies, Simple will go in the hole for about $22,000, less whatever reprint rights bring in. The risky nature of the book-publishing business becomes clear from this example when one considers how many profitable titles will have to be published by Simple Publishing to make up for just this one loser.
Other pricing considerations
There are several other factors that may affect the cover price of a book: the use of color for photography, art, charts, maps, or graphs. A thirty-two page children’s picture book with four-color illustrations, for example, may cost out as high as The French Wench. Another is the nature of the book itself. A thick, authoritative, general reference book may require a number of authors, all of whom have to be paid, plus the work of a number of editors who specialize in this kind of book. One good example of this is a general encyclopedia, and another is reference books such as Gale’s Contemporary Authors series, which uses the services of dozens of editors. Overhead, and thus unit cost, are greater at Gale than at a trade house where half a dozen editors can handle dozens of books, so the higher prices for such reference materials are not really excessive.
Finally, there is the audience for whom the book is intended. A specialized scientific monograph may sell to only a few hundred readers worldwide, so its initial print run will reflect this. But this small print run will increase the cover price greatly, because the fixed costs involved in producing a book that will sell 300 copies are not that much less than those for producing a book whose profits will come from sales of 100,000 copies; the variable costs, however, are much, much lower.
The publisher’s dilemma
After all is said and done, publishers only have a few choices if they are to increase their profits and minimize their losses. They can cut fixed costs such as overhead by laying off staff, but too much cost-cutting may lead to them acquiring, editing, and designing fewer titles and potentially losing part of their share of the market. A publisher can cut manufacturing costs by using less expensive paper and bindings and hiring productions out to a less expensive printing company, but such cost-cutting too often leads to books of inferior quality. Finally, a publisher can raise revenue by increasing the book’s cover price, but there are limits to how much even the most gullible book buyer will pay for a book, and increasing revenue in this way may decrease sales enough to negate projected profits.
In most cases, publishers probably do try to keep costs down and increase revenue by raising prices only when it is necessary. But once one publisher breaks a commonly accepted price barrier, too many others will follow, whether it’s necessary or not. No acquisitions librarian ever thought a piece of pop fiction would exceed $30.00 in price, but that is now common. No one ever thought a mass-market paperback priced at more than $2.95 would sell, but prices of $6.95 to $9.95 are the norm today. And children’s librarians probably never envisioned shelling out $21.00 for a picture book, but they are doing just that.
All of this creates a big problem for librarians, whose budgets, by and large, have not and likely never will keep pace with the spectacular increase in book prices. Whether it will all end no one knows, but in the meantime we pay and pay, and pay some more – because we have no choice. This is all the more reason for us to keep book costs down in the only way we can, by choosing the best possible vendors … But first let’s look at some of the trends in publishing that also affect book costs.
Some trends in book publishing
In the mid-1970s, a group of California librarians began publishing an alternative journal called Booklegger for their colleagues who were not satisfied with the then-current crop of library publications. At that time, library journals best promoted conservative views of the library world and the issues facing those working in libraries, but they were also downright timid – some may say cowardly – when it came to discussing the more controversial trends and radical movements within the profession of librarianship, and those changes in the book publishing industry that directly or indirectly affected librarians. Celeste West, one of Booklegger’s founders, was particularly concerned with the ever-increasing number of mergers and acquisitions within the publishing industry and their effects on the kinds and quality of books being published. In 1975, West predicted that as the number of trade publishers decreased through merger or acquisition, many fine publishing houses would disappear and that consequently library collections would suffer.
The accuracy of West’s predictions was confirmed by the industry over the next two dozen years. By the year 2000, hardly a single major trade publisher (and few minor ones) had escaped merger or acquisition, the latter sometimes hostile. One by one, the great old publishing houses were acquired by other publishers or by conglomerates with little or no connection to the book-publishing business. One of the first of these was Simon & Schuster’s acquisition in 1975 by Gulf & Western Industries, Inc. (now Paramount Communications) a company that owned Columbia Pictures and was only at the beginning of a veritable tidal wave of takeovers and mergers. Following the dissolution of other long-established houses, by the late 1970s several antitrust suits were brought by the U.S. Department of Justice, many of which remained in litigation for a decade or longer.
Over the next fifteen years some of the major acquisitions and takeovers were those of G. P. Putnam’s Sons, taken over without a struggle by the gigantic entertainment conglomerate MCA, Inc.; then there was Atheneum’s merger with Scribner in 1979, and Scribner’s subsequent takeover by Macmillan in 1984. Dodd, Mead became a subsidiary of a religious publishing house, Thomas Nelson, which was subsequently itself brought by a trio of entrepreneurs and soon found itself in financial difficulty, but Nelson soon recovered and by 1995 was the ninth largest trade publisher in the United States, even with its output limited to religious books. Lippincoutt was taken over by Harper & Row, which itself acquired by newspaper czar Rupert Murdoch’s News Corporation in 1987 and reborn as HarperCollins. Doubleday acquired mass-market paperback publishers Dell Books, Delacorte Press, and Dial Press; then was itself acquired, along with Bantam Books, by Bertelsmann AG, a giant German publishing firm.
Prentice-Hall was purchased by Gulf & Western in 1984 and became a subsidiary of that company’s Simon & Schuster, making S & S the largest trade publisher in the nation at that time. But S & S did not remain at that pinnacle for long, however; by 1998, Random House, owned by the newspaper family, Newhouse, had purchased Times Books and Crown Publishers, making Random the country’s largest trade publisher. Viking Press was brought by the British house, Penguin, which later, as the Penguin Group, acquired Dutton, Putnam Berkley, G. P. Putnam’s, and a host of other hardcover and paperback publishers. The Time Warner conglomerate bought Warner Books, Little, Brown, Time-Life Books, and others, while another German publishing company, Holtzbrinck, was acquiring Farrar, Straus & Giroux, Henry Holt, and St. Martin’s Press, among others. There were many other moves of this type throughout the 1980s and 1990s, culminating in Bertelsmann’s acquisition of Random House and all its holdings from the Newhouse family in 1998, which then made the Bertelsmann group the largest publishing conglomerate in America.
At the time of this writing, the number of major American trade publishers who had not been acquired or taken over was in the single digits. But the phenomenon was not limited to adult trade houses. Children’s book publishers, educational publishers, paperback (both mass market and quality) houses, technical/professional publishers – everyone was fair game, and few were the houses that escaped unscathed. The brief roster of changes above gives only some indication of the turmoil that has beset the book-publishing industry during recent years, and it shows no sign of subsiding even now.
How have these rapid and revolutionary changes in the book-publishing business affected the acquisition of books for library collections? There are a number of answers, not many of which are encouraging, and they arise from the impetus behind the mania to merge that has characterized book publishing over the last few decades. The chief reason, as one might guess, is economics, the same reason for the major upheavals among many other American industries in the 1980s and 1990s. As has been noted earlier, publishing has always been a risky business and, for most publishers, one where profits are modest compared to those of other industries. Book publishing is also a very small industry in comparison with, say, automobile manufacturing or the oil industry; many individual American companies have gross annual sales that exceed those of the entire book-publishing industry. Why then are such giant conglomerates as Paramount Communications (formerly Gulf & Western), Viacom, and Time Warner interests in acquiring such relatively modest operations as publishing companies?
There are a number of good financial reasons. For one, publishing is a high risk business that requires a substantial investment long before the finished book is ready to be sold, the rewards – if the book is a big seller – can be substantial; the profit to be gained from having one or more authors who can write the “big number” books can be enormous and help write off all the publisher’s other mistakes in judgment. For example, Publishers Weekly, in the December 14, 1998 issue, did a lengthy profile of one of the kind of authors every publisher hopes to find. Dean Koontz is perhaps not a megawriter like Tom Clancy or Danielle Steel or John Grisham, but his sales figures are astonishing. According to PW, Koontz has been writing for about thirty years, and has had published “nearly 80 books with aggregate sales of more than 200 million units worldwide in 33 countries. Each year [his] frontlist and backlist combined sell about 17 million copies worldwide.” Just to get an idea of how much one new Koontz book can be worth to his publisher, Bantam Books, let’s look at what happened to Fear Nothing, published in January 1998. The book’s cover price was $26.95 per copy. The first printing was 400,000 copies, with a total cover price value of $10,780,000. The discount the publisher had to offer to wholesalers and retailers was probably about 50 percent, which left Bantam Books with about $5,390,000 to play with. Out of the 400,000 copy first printing, all were sold. The author’s royalties (15 per cent of the original cover price) approximated $1,616,000, while production costs came to about $2,516,000; the two major costs then, add up to about $3,772,000, leaving Bantam with a gross of approximately $1,618,000 – not exactly peanuts. When a few other things are factored in, the profit really begins to grow. Almost immediately after its original publication date, Bantam had a second print run of another 100,000 copies; the profit on these would be greater because the only costs for the additional copies would be the variable costs, such as paper, binding, and printing. In addition, large-print rights were sold, and a limited, signed edition ($150 per copy) was printed. And since Bantam is also in the paperback business and had the rights to reprint in that format, the costs for Bantam were less to produce the paperback edition itself. (In December 1998, Bantam shipped its first paperback printing of Fear Nothing, 1.8 million copies, to ties in with publication of Koontz’s new book, Seize the Night, also scheduled for December 1998 publication, with a first run of 400,000 copies.)
Even when a publishing house does not have a spectacularly successful writer such as a Dean Koontz or Stephen King (who was reported by the British paper The Guardian in February 2000 to have signed a three book contract with his British and American publishers – Hodder and Staughton and Simon & Schuster, respectively – for $48 million) on its roster, however, good editorial staff who know how to choose books with sales potential can go far toward ensuring profits that are steady, even if relatively modest, over a long period of time. One example is St. Martin’s Press, long an independent publisher but now owned by the German Holtzbrinck organization. St. Martin’s rarely publishes a “blockbuster” title but instead produces some 600 solid titles each year that are brought primarily by libraries – including mysteries, regency fiction, science fiction, and gay fiction – to produce a return on investment of more than 30 percent, a very respectable return in any investor’s language. And in early February of 1999, the New York Times carried the obituary of publisher Marion Boyars, who published “only what she liked, whether the book was likely to sell or not”; and although the names of most of the authors of the 500 titles she published may be unfamiliar to most American readers, among them were dozens of the world’s finest writers, including four Nobel Prize for Literature winners and a number of other prestigious award winners.
Another source of relatively modest but successful profit can be a house’s children’s line; practically no one but libraries purchases hardcover children’s books, but they purchase them in quantity and over the years. Wanda Gag’s Million of Cats, for example, has been in print for nearly a half century, but every year hundreds of libraries purchase new copies because the little book is beloved by children, and the copies simply wear out from being read and handled so much. HarperCollins, perhaps one of the biggest and most successful publishers of children’s books, attributes a great deal of its financial success over the years to its juvenile line. This kind of slow but constant return on investment over the long haul is very attractive to investors – as HarperCollins proved to be to Rupert Murdoch’s News Corporation.
At the same time, the very smallness of the publishing world makes it attractive to investors. A conglomerate seeking to diversify might have to spend tens of billions to take over a major company in, say, automobile manufacturing or pharmaceuticals. In 1984, however, Gulf & Western paid some $700 million in its takeover bid for what was then the largest American publisher, Prentice-Hall; this sum was far, far less than what it would have had to pay for Ford Motor Company or General Motors; it was only in the late 1990s that a few book-publishing company buyouts exceeded a billion dollars. To the investor seeking to diversify holdings without assuming major financial obligations, a publishing house can be a real bargain.
For librarians, the ongoing concentration of the publishing industry caused by mergers and acquisitions has both positive and negative aspects. On the positive note, it has on occasion resulted in saving some publishing houses from going under because of financial pressures which for libraries means that a certain degree of diversity in the publishing of the books we choose to buy is maintained. A good example is that of Atheneum, a distinguished house created in 1958 by three best men in the book business – Alfred Knopf, Jr., Simon Michael Bessie, and Hiram Hayden. It was, said the New York Times on March 15, 1958, “as if the presidents of General Motors, Chrysler, and Ford left their jobs to start a new automobile company.” The books they published not only were distinguished literarily but also sold well. However, a lack of capital – as well as personality conflicts among the partners – brought the fledging company to the point of financial crisis by the 1970s. The owners realized that in an infusion of much-needed capital could only come from sale of the company or from merging with another publisher.
The one thing they agreed on was that they did not want to be taken over by a nonbook corporation that would swallow them up, and so they fused any such offers. The solution came, however , in Atheneum’s merger with Scribner’s. As a result, Atheneum was able to continue to produce a line of critically praised books through the next few decades – even after 1984, when Scribner’s merged with Macmillan (which was itself brought by Maxwell Communications). Doubleday, too, faced a major financial crisis during the 1970s and was finally bailed out by Bantam, later of course itself acquired by Bertlesmann. In both cases, the alternative to merger appeared to be oblivion. These are not isolated or even uncommon cases.
There is another side to that positive aspect mentioned above, however. For every publishing house that has been saved, another has been lost through acquisition or takeover. As discussed earlier, Doubleday brought one of trade publishing’s most prestigious lines when it acquired Dial Press, only to dissolve the newly acquired company a short time later because of the parent company’s financial difficulties. Coward and McCann, another fine house, was brought by Putnam’s, and then quickly disappeared from the publishing scene entirely. World Publishing, once a giant in the industry, was taken over by New American Library in the late 1960s and within a few years just faded away; ironically, NAL’s new owner, Penguin, soon abandoned New American Library to the same fate. Juvenile publishing was not immune to the ware of the 1970s and 1980s, either. A fine children’s house, Bradbury Press, was brought by Macmillan, probably because of that house’s stellar author, Judy Blume, but soon after Bradbury was allowed to wither on the vine. In the late 1990s, two more excellent lines were lost too; Cobblehill and Lodestar Books each counted a number of prizewinners among their authors but still bit the dust.
By the end of the 1990s, dozens of the grand old names in publishing no longer existed, and library collections could only be the worse for the loss, because every company’s demise lessons a library’s purchasing options. But add to this another development of the last few decades, the rise of the “blockbuster” book, and the negative effect of publishing trends on library collections become even more obvious.
More than a decade ago, Joni Evans, then president of Simon & Schuster’s trade division, said in an address to the American Bookseller’s Association convention, “It’s a dramatic and sexy time now [for publishers]; it feels like we’re the new Hollywood.” She was referring to the then-new (but still flourishing) emphasis in trade publishing of the blockbuster book, a book that can be expected to sell hundreds of thousands or even millions of hardcover copies at an extraordinarily rapid rate. Books by Stephen King, Danielle Steel, John Grisham, and a few others can almost guarantee this kind of sale and so guarantee whopping profits for their publishers. Evans went on to say that she’d rather pay $2 million to one author like this for a new book than buy ten lesser (in the sense of sales) authors’ works at a tenth of that cost each, primarily because with big-name authors the risk is just not there.
What this kind of thinking portends for library book purchasers is obvious. Librarians, especially in public libraries, do buy best-sellers, but good librarians are likely to be just as interested in obtaining the works of those ten “lesser” authors that Evans would prefer not to publish at all. Publishing’s response to criticism of this sort is to say that it’s the blockbuster books that make it possible to publish the works that won’t sell in huge quantities; at one time Doubleday published a small but influential line of poetry books and claimed that it was the “biggies” that paid for its poetry continuing existence (which shortly after met a quiet demise), but there’s little real evidence that this relationship of best-sellers and less than “best”-sellers has any real connection. At the same time, paying millions of dollars up front for a certain author’s new book means that the publisher must recoup that amount and do it quickly; the easiest way to do so is to charge more for the finished book, and there’s little doubt that this is a major factor in the continuing escalation of book prices – a real concern for libraries. (It is interesting to read Publisher’s Weekly ‘s annual issues in which they describe publishers’ would-be best-sellers that turned out instead to be bombs. The stories would be amusing if it weren’t for the ugly fact that library dollars did a lot to pick up those losses.)
The impact of higher prices on libraries is that libraries can purchase fewer and fewer books each year – even when library budgets show a modest increase. In fact, very few librarians saw their budgets increase by 100 percent or more in the 1980s and 1990s, yet book prices tripled during that period. In addition, the nothing-short of phenomenal increases in serials’ prices over the last decade, plus the increasing pressure on libraries to spend more on electronic information sources, have also had a profound effect on library book purchasing. Ergo, for reasons completely beyond their control, librarians are buying fewer books, and fewer books mean weaker collections. No one expects that publishers will help the situation by ceasing to risk so much to get phenomenally salable books, but while “blockbuster” may mean “sexy” to Joni Evans and publishers like hers, there’s nothing sexy about them at all; there is something just plain greedy about the whole situation, however.