$2 BILLION FOR $1 BILLION OF BOOKS: THE ARITHMETIC OF LIBRARY E-BOOK LENDING

March 5, 2012
Posted in: Featured

Library Renewal wants to help libraries build a powerful new way to get econtent to their patrons. We envision a new infrastructure, one that is vastly improved, equitable and fairly priced (with hidden costs eliminated). In order to figure out exactly how to make something like that a reality and create an actionable plan we have been busy doing research and meeting with experts from a variety of areas. We’ve naturally talked with plenty of library folks, but we have also actively included and sought out others that have legal, business and publishing expertise. Jonathan Chambers, the author of this piece, fits that bill perfectly and has worked directly with us a great deal over the past year. Here you’ll see the sort of approach some folks working with Library Renewal are thinking about. We (both Library Renewal and Mr. Chambers) would love to hear your reactions to this post in the comments.
*note* While the pricing changes implemented very recently by Random House are not factored into the dollar amounts discussed here, that in no way changes the conclusions that are drawn in this piece. Drastic changes like what we have been seeing related to libraries and econtent are endemic to the systems currently in place. We believe that these sorts of market shifts serve to strengthen the premise that specific types of action are in order and that Library Renewal is the perfect partner for that work. Enjoy!

$2 BILLION FOR $1 BILLION OF BOOKS: THE ARITHMETIC OF LIBRARY E-BOOK LENDING
Reports about library e-book lending over the past year would lead the casual observer to think that public libraries could be the death of publishing, or e-books could be the death of public libraries, or both. I became curious about the economics of e-book lending, and what I have found has made me even more curious.

My conclusion: public libraries’ acquisition and lending of e-books could be structured in a way that would not have any greater or lesser financial impact on the publishing industry than library lending of physical books. This is true even if e-book lending is made more convenient (less friction) for library patrons, as it should be.

Prior to the price increases announced by Random House I looked up the prices for 70 books from a recent New York Times bestseller list – fiction and non-fiction, hardcover and paperback. It is admittedly a small sample size, but one that appears representative of prices as a whole. Only half the books on that bestseller list were even available to public libraries in e-book format, which is a separate problem and one that is exacerbated by the recent announcement by Penguin. For the books that were available, libraries paid on average $24.25 from OverDrive for the e-books ($31.50 for newer titles), and $12.10 from Baker & Taylor for the same books in physical form.

Some suggest that higher e-book license pricing is fair because, unlike physical books, e-books will not wear out. (That underlying assumption is not necessarily true. I have books on my bookshelf that are over fifty years old. By comparison, whether I or anyone else will still be reading from my e-book collection on a Kindle or Kindle app in fifty years remains to be seen.)

More to the point, the longevity of a public library book is related more to a book’s enduring popularity than the integrity of its binding. E-books could be far more efficient economically than physical books. But, alas, currently they are not. Libraries cannot resell e-books and cannot pay less for variable, limited term licenses. So libraries are in a continual state of buying too few copies of a popular title in the short term and too many in the long term.

Is the doubling of prices fair? It would be if e-books were twice as cost-efficient as a physical book, either because they could be loaned to two or more people at once, or because the e-book is useful to the library for twice as long. In other words, price alone is not the right way to think of the value to a public library of an e-book or any item a library acquires for the benefit of its patrons. A better measure of value is the price per circulation.

According to IMLS survey data, from fiscal year 2004 to 2009, U.S. public libraries spent over $7.6 billion acquiring content to lend to their local communities – physical books, of course, as well as DVDs, music, audio books, periodicals, databases and e-books. Over that same period, public libraries circulated over 13 billion items. Of course, some items that circulated during this time period were acquired before 2004 and some items acquired during the time period will have circulated after 2009. Public libraries weed out books that have declined in popularity; collections increase, as does the population a library serves. With more data, I could calculate cost per circulation with great precision. But, as a rough and imperfect estimate of value, isolating just the acquisition costs, libraries spent $7.6 billion/13 billion circulations, or $0.58 for each item’s circulation.

You could quibble with my methodology, but my point is straightforward – using library data, we can compare the economics of e-book acquisition and lending with the acquisition and lending of other library materials. It is too early to tell, but it does appear that libraries pay more than $0.58 per circulation for the acquisition of e-books.

The average HarperCollins bestseller, for example, limited to 26 checkouts, costs $22.21. So if libraries loan these books exactly 26 times each, the books would cost about $0.85 per circulation, or 47% more than other library items. That is not to be critical of HarperCollins – their prices might be too high or the checkout limit too low, but at least their bestsellers are available to libraries. And using the HarperCollins approach, it would be possible to ensure that the economics for publishers and libraries does not change.

In short, publishers and libraries can ensure that the economics of e-book lending is no better or worse for publishers or libraries than the lending of other library materials.

In addition to acquisition costs, the hosting fees from OverDrive, 3M, or Adobe add yet more cost to e-book lending, and could be compared to the circulation cost of maintaining and lending physical items. Electronic hosting fees ought to be far more cost-efficient than physical circulation costs, but they do not yet appear to be.

I am hard pressed to find examples in other areas of the economy where the digital equivalent of a physical object is both less efficient and more costly. The reasons for the economic inefficiencies in library e-book lending are manifold. There is today no competitive marketplace for library e-book licenses, no digital first-sale doctrine equivalent to the first-sale doctrine for physical books, no way to donate consumer e-books to libraries, no way for libraries to purchase most e-book licenses directly or dispose of extra copies once a book is no longer popular. The majority of libraries rent e-book licenses from vendors who also host the e-books and charge both for the e-book license and the hosting services. As a consequence, libraries pay monopoly rents. The licenses are tied to the hosting systems, creating further market distortions for libraries.

If public libraries are not getting the same value from e-book lending, how much does it matter? In economic terms, the loss due to the inefficiencies is known as a deadweight loss. This deadweight loss will be reflected in the budgets for public libraries, and in fewer books available through libraries. In the chart below, the loss is shown as the difference in the number of books libraries will be able to purchase unless market conditions change. Public libraries are in the literacy business, so consider it a literacy deficit.

What should be done? I am not from the public library world. My background is in law and business and government, so my views may not be consistent with the way things work at public libraries. It seems to me that two related electronic platforms need to be developed: (1) an open source hosting platform that can be utilized by any public library and (2) an electronic marketplace for the direct purchase of e-book licenses by libraries.

First, until all of the existing vendors permit the transfer of e-books from one hosting platform to another, the development of an open source hosting platform is critical to break the current e-book tying arrangements and protect the public interest. The platform being developed and in use in Douglas County, Colorado seems a great start. Jamie LaRue, Monique Sendze and the others at work in Colorado on that platform shouldn’t be expected to carry the load alone.

Second, in order to host e-books, libraries must have possession of the electronic content, and to date, no broad-based mechanism exists to sell e-books directly from publishers to libraries. An electronic marketplace for buying and selling e-book licenses could provide direct purchasing by libraries, as well as experimentation in pricing, terms, and licensing periods, leading to more efficient arrangements and bringing e-book costs to libraries more in line with physical book costs. Not all e-book library licenses need to be perpetual in term, not all licenses need to be limited to one user at a time, not all pricing needs to be uniform at all times, and not all pricing need to be determined beforehand by publishers.

Perhaps the ALA and the Association of American Publishers could work on such a project jointly and establish an electronic marketplace for the sale of e-book licenses to libraries. Economic efficiency does not mean less money for rights holders.

I don’t know the right pricing model for library licenses and I would suggest that no one does yet. I hold one simple view on e-book pricing for public libraries – that the economic arrangement between rights holders and libraries for e-books should be roughly equivalent to the arrangement for physical books and other materials, no better and no worse.

Publishers, concerned that sales of their bestsellers are being affected by library lending, can already limit the number of checkouts. If publishers are still concerned, further steps could be taken. A library could be limited to a certain number of copies of each title for the population it serves, or limited in their e-book collection to the same number of copies of physical books it holds for each title. These are artificial constraints, and, in my view, unnecessary given the one real constraint faced by libraries, which is the size their budgets. There is over 100 years worth of data on public library book lending and pricing. Certainly, people of good will can find common ground.

If I were running a collections department, I would take a HarperCollins deal over an unlimited use deal every time. I would prefer variable pricing – more checkouts initially for a higher price, fewer checkouts later for a lower price. But the principle of checkout limitation does not bother me; in fact, it makes a lot of sense to me.

What really bothers me about e-books and public libraries? The tying arrangements between the acquisition of e-books and the hosting platform. As a consumer, I am forced to accept that if buy an e-book through Amazon, that book will reside on an Amazon server and work only on an Amazon device or app. But as public institutions, libraries are spending public resources on material that is locked up on one hosting system and lost if they decide to switch hosting systems. That is awful and unnecessary. Public libraries don’t have to accept it and shouldn’t stand for it.

My unsolicited advice to the public library community: Don’t bother asking OverDrive to change its contracts back to the way they used to be. Ask instead that one of your organizations – ALA, COSLA, ULC or some other – fund efforts to build and maintain a library-led, open source, hosting platform and an electronic marketplace for the direct acquisition of e-books licenses. Or find a modern day Andrew Carnegie to fund an electronic infrastructure for libraries. Take those steps to protect the public interest, and an improvement in the economics will follow. Take them now before it is too late.

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