Strategically Speaking: How Will E-books Impact Your Bottom Line?
1. Plant Cost. Plant spending (aka product development costs) will likely remain flat or decline—the prepress process for e-books has much in common with print—so there's unlikely to be any big money squeezed out from this line.
2. Manufacturing Cost. Paper, printing, binding and component expenses disappear. The printing press becomes a thing of the past.
3. Inventory Obsolescence. Obsolescence represents the cost of unsold inventory—product manufactured that never leaves the warehouse or is returned. Once the product has been deemed unsalable or only salable at a price well below its manufacturing cost (i.e., a remainder sale), the value of the unsold inventory is charged against the income statement.
4. Royalty Cost. Royalties may turn out to be the 800-pound gorilla in the room with authors demanding a larger share of publishers' revenues on the grounds that the publishers' costs and risks have both been reduced and, consequently, a more balanced sharing of the revenues is appropriate. Odds are that publishers will give ground here and increase royalty rates, as the alternative is more direct relationships between e-booksellers and big-name authors (e.g., Stephen Covey's exclusive digital rights deal with Amazon).
Gross margin is the difference between net sales and the four major components of cost of goods sold. With the elimination of manufacturing and obsolescence costs, gross margin is likely to grow, despite anticipated increases in royalty rates. Put another way, odds are that publishers will eventually see e-book gross margins equal or superior to the current business model because the major components of the costs of producing the printed product will disappear entirely.
Operating costs are defined as the recurring expenses connected with a business' operation. Operating expenses typically have both a large, fixed component (i.e., costs that don't change dramatically with the level of activity, sometimes described as "overhead," and include expenses such as salaries, rent, insurance costs, etc.) and variable costs, which vary with the level of activity. Major components of operating costs include: