The Real Value of Things (in the Age of Digital Reproduction)

Tuesday, February 3rd, 2009

In my earlier post about the Kindle, I wondered why Niall Ferguson’s new book cost so damn much. $30 for a bunch of paper, ink, and cardboard? This, and the current recession, got me to thinking about the value of information and its physical manifestations.

Why books cost so much

I did a little research and I found an old Salon piece from 2002 by Christopher Dreher that ventures forth a good breakdown:

Why do books cost so much? Consumers are often baffled at the price tag attached to what appears to be little more than a mass of paper, cardboard and ink. A whole host of factors, including the size of the book, the quality of paper, the quantity of books printed, whether it contains illustrations, what sort of deal the publisher can make with the printer and the cost of warehouse space, all affect the production costs of a book. But, roughly speaking, only about 20 percent of a publisher’s budget for each book pays for paper, printing and binding, the trinity that determines the physical cost.

The rest of what you shell out for, say, the new Donna Tartt novel pays for the publisher’s overhead (the cost of maintaining a staff of editors, proofreaders, book designers, publicists, sales representatives and so on), and for the cuts taken by distributors (who run warehouses that supply books to retailers) and booksellers. Promoting the book is another expense: printing up catalogs presenting each season’s titles to booksellers and the media, purchasing ads, mailing out hundreds of review copies to critics and sending the author (if he or she is lucky) on a book tour. So are shipping fees and the storage costs on unsold copies.

Why food in restaurants costs so much

This is a big aside, but I am reminded of my days running the back of the house for a restaurant, when I had to do food costs and pricing on every item in the menu. This involved standing on the line with a digital scale and as the cook was firing each dish, I would stop him, weigh each piece of meat or veg he was using down to the scallion, and hand it back to him so he could finish the dish. (I know, I know, you’re supposed to do all this before you launch. Hey, it was my first time! Gimme a break!) Later I made a spreadsheet of all the bulk prices we paid each vendor from our order sheets and calculated the actual food cost of each dish. It was painstaking work but here’s what I learned from that experience:

If you want to know how much an item on the menu costs in most mid-range restaurants (1 to 2 stars), take the price on the menu and divide by 3. That’s the cost of the raw materials it takes to make the item. There’s some debate in the restaurant industry as to whether labor factors in, but in most New York restaurants that cost is usually deemed negligible (you can guess why). If restaurants had to pay living wages and benefits to their back of the house staff, you would probably see those prices go way up, which is why fancy restaurants cost so much. The price of a steak has an upper bound. It’s the overhead for everything else (ambience, Daniel Boulud’s salary, etc.) that you’re paying for.

Why CDs cost so much

Pennies That Add Up to $16.98: Why CD’s Cost So Much
A Neil Strauss piece back in July 5, 1995 for The New York Times (before he became a pick-up-artist and wrote The Game) points out that (back in 1995) a CD, say, Rod Stewart’s “A Spanner in the Works,” cost “more than 100 times the cost of the materials used to manufacture it”. (Incidentally, 14 years later it’s selling for $8.99 on Amazon.)

Setting prices “is very arbitrary,” said a top executive at a major label, who described his company’s pricing policies only on condition of anonymity.”We’re trying to raise CD prices,” he said. “The reason for this is that our costs are escalating in such a marginal way, everything from marketing to promoting to signing bands. It costs $400,000 to $600,000 to sign a band. The first video costs a minimum of $50,000. Touring is more expensive, and people’s salaries are a lot higher. Our profit margins are being squeezed.”

In a word: price-fixing.
Also here’s a really good Fresh Air interview with Rolling Stone contributing editor, Steve Knopper, talking about the rise and fall of the record industry.

Why does a newspaper cost so much?

Yesterday, the Silicon Alley Insider did a great little back-of-the-envelope thought experiment to figure out first around how much it costs the New York Times each year to produce the paper and distribute it (including cost of printing, salary and benefits to all the writers and employees) and concluded it would be cheaper to give each of their subscribers a Kindle (current market value, a whopping $359)! (Think of all the trees!)

According to the Times’s Q308 10-Q, the company spends $63 million per quarter on raw materials and $148 million on wages and benefits. We’ve heard the wages and benefits for just the newsroom are about $200 million per year.

After multiplying the quarterly costs by four and subtracting that $200 million out, a rough estimate for the Times’s delivery costs would be $644 million per year.

The Kindle retails for $359. In a recent open letter, Times spokesperson Catherine Mathis wrote: “We have 830,000 loyal readers who have subscribed to The New York Times for more than two years.” Multiply those numbers together and you get $297 million — a little less than half as much as $644 million.

I predict that one day in the near future, a large media company (if not the Times) will come to this conclusion, and the eBook reader market will explode. Either that, or they will come to the realization that most people have a computer (or at least access to one) and a cell phone already (plus people won’t really do pass-along with Kindles or eBook readers) and decide to just go completely digital.

Why do Videocassettes DVDs cost so much?

Do we really need to go over this? I quote from another post in 1995, this time from Nicholas Negroponte, who really started  me off thinking about the distinction between atoms and bits with his seminal book, Being Digital:

During a speech I gave at a recent meeting of shopping center owners, I tried to explain that a company’s move into the digital future would be at a speed proportionate to the conversion of its atoms to bits. I used videocassette rental as an example, since these atoms could become bits very easily.

It happened that Wayne Huizenga, Blockbuster’s former chairman, was the lunch speaker. He defended his stock by saying, “Professor Negroponte is wrong.” His argument was based largely on the fact that pay-per-view TV has not worked because it commands such a small piece of the market. By contrast, Blockbuster can pull Hollywood around by the nose, because video stores provide 50 percent of Hollywood’s revenues and 60 percent of its profits.

And 14 years later, we all know who was eventually proven right. Can you say Netflix?

Conclusion

This recession is bringing the digital revolution and all of its myriad, economy-altering implications to a head, accelerating the inevitable. This is no time for nostalgia. Do you know how to publish and remix your content to multiple channels and extract full value from this networked, information economy?

This is REDUB.

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