February 2nd, 2010

it doesn't mean what it seems to mean

I have a couple of examples of measurements or metrics that people think they know what they mean, and often are wrong. And no, I'm not getting into the whole bra thing, altho that would be a lovely example as well.

The first example comes from real estate: square footage. I think there's some general agreement on what a square foot is; the questions arise when describing a piece of real estate, whether a condo or a free standing house or whatever, as having a certain number of square feet. A first time home buyer might reasonably assume that you could measure all the space inside, add it up, and, subject to the width of the walls and similar, be pretty close to the square feet described on legal documents and/or the listing. Alas, it is not so. In fact, the square feet could be calculated in any number of ways, but a fairly typical one is to measure the outside of the house and then multiply that area by the apparent number of floors. Watch out if you have a foyer or great room or whatever that extends into the second floor; you're getting taxed on that. Unsurprisingly, there are other ideas about what square feet measure in a real estate listing and I'm not even going to attempt to summarize those.

The second example is one that I am hypothesizing based on hopelessly inadequate knowledge, and that is "per unit cost". There's some raging debate about how much ebooks "should" cost, and whether there is a per unit cost at all for an ebook. People claiming there is no per unit cost per ebook are saying, no paper, no ink, no glue, etc., hence, no per unit cost. People claiming there is a per unit cost are saying you should take a whole lot of other costs (possibly including paper, ink, glue, etc.) and figure those in.

Here's an unrelated expert:

http://blog.accountingcoach.com/product-cost-per-unit/

"Since some of the manufacturing overhead costs are fixed in total (factory rent, factory depreciation, factory managers’ salaries), the per unit cost of a product will depend upon the number of units manufactured during a given year."

Obviously, if a book is exclusively sold without paper, there are no paper costs associated with units of the book. If a book is sold exclusively on paper, there are paper costs associated with units of the book. However, when you buy a book, you can't look at that book and figure the per unit paper costs -- you don't know from buying a book how many books were made. Books made but unsold (ever) increase the per unit costs of the books that were sold -- at least they do by some calculations.

When a book is sold with paper and without paper, there is a legitimate debate regarding whether the paper costs should be born exclusively by the units that are made of paper, or should be shared across all units. This is what I mean by slow transitions resulting in people paying a lot more, and people wanting to move straight to the cheap future of no-paper-in-books are not happy about it. But it also aggravates retailers who have been dependent on a small number of people buying a lot of books. As those people migrate to ebooks, there are some unpleasantly unpredictable steps down in the number of paper books they move and a corresponding increase in the number of pulped (or remaindered) books -- ebooks increase the per unit cost of books as long as there is paper involved anywhere along the line and there is uncertainty about how many of those books will sell.

Even if you _do_ know how many of those books will sell, you might not be certain _where_ those books will sell. As long as some of the paper is moving through physical stores (often located to increase convenience to the customer, thus a lot more of them than might be perfectly efficient according to other metrics), those physical stores will wind up needing inventory to sell (only a fraction of people place orders and wait for them to arrive in physical stores) -- and that means even more pulped books as they'll require a greater number of books spread out to get the sales.

On an unrelated note, ebooks do have a meaningful per unit cost that could be calculated based on the amount of storage and bandwidth required to have them available to customers and deliver them. That's probably dominated for the kindle by the cellular charge to get it from Amazon to the kindle -- and I think that's on the order of what the author's royalty is per book. If you think that's dismissible, then so is what the author is getting paid.

old skool retailing

I mentioned in an earlier post that once upon a time, the MSRP wasn't suggested: it was enforced. The post WW2 rise of the discounters -- associated closely with the development of suburbia -- included some key court battles the led to the replacement of manufacturer defined pricing with a wholesale model that led directly to Pile It High, Sell it Cheap. It probably wasn't an accident that this was all happening in the same time frame that railroads (transport priced by class of goods, based on the retail value of those goods) were getting creamed by truckers (transport based on a pretty inadequate calculation of total cost to move the crap) who were taking all the high value business away from railroads, leaving them to move a bunch of stuff like coal and agricultural products at regulated rates that didn't permit them to maintain the track, much less anything else.

For reasons that are murky, and honestly, I just don't care about much right at the moment, publishing retained a lot of the old skool manufacturer defined pricing. It also retained some other characteristics of old skool retailing. A discounter, for example, buys the goods for cash, or financed by someone other than the seller. Thus they now own all the risk associated with whether those things will sell to retail customers. The manufacturer got rid of that risk and with it, lost the opportunity to enjoy the possibility of vast profit should every last one of those things sell for full price. What the manufacturers may not have anticipated was how easy it would be for those discounters to then switch to other manufacturers. In other countries. Employing child slave labor. That they didn't pay. I mean, who could have seen that coming?

Book retailing, new book retailing in any event, retained a lot of old skool characteristics: financing for product supplied by maker on generous terms (months and months before you had to repay, right to return for full refund, blah, blah, bleeping, blah). Running a bookstore was a dodgy business, and publishers shared a lot of the risk. When Amazon first entered this world, they were a great deal for the publishers, because they paid on time and didn't return hardly anything. And Amazon used those months of no-interest float to expand their business. It was a party all around, especially once people like Mary Meeker got a glimmer of an idea about how that all worked.

I don't know when the publishers figured out that this wasn't going to be a completely free ride, but it was long before Amazon released the kindle. When did publishers realize that the smaller orders, higher rate of returns and bookstores going out of business weren't purely attributable to indies getting wiped by B&N and Borders? That uncertainty went straight to the bricks and mortar crowd which wasn't benefiting from the existence of Amazon in any way at all -- very much unlike the publishers.

The kindle must have sped this process up. A lot. Altho it is not easy to tell precisely what can be attributed to the economy going bust and everyone buying used books at Friends of the Library booksales versus heavy consumers buying kindles and slurping up ebooks at a frenetic rate, trading the authors whose names they can't remember and/or can't find available on the kindle for new authors, some of whom are giving it away for free. The kindle must have brought home to the publishers that their per unit cost on paper books was going through the roof -- and not just because of a fuel price spike. I've got zero data, but I bet their return-and-pulp rate went absolutely nuts. They tried to deal with it by engaging in a price war. I suspect that did not go well.

I think behind all the per unit cost arguments and what ebooks "should" cost are a bunch of publishers literally cannot supply paper books to their bricks and mortar retailers if ebooks are being sold for 9.99 -- even if they're getting a bigger cut of the 9.99 than they will get out of the slightly higher price. Publishers _have_ to slow this transition down, or the exodus of the tiny fraction of people who buy the vast majority of books will destroy the entire sector.

I guess we'll be finding out in the next few years whether that worked or not.