Financial Models for Digital Products

Timothy Doyle, Harvard University Press

February 14, 2011

Overview of Harvard University Press

2

98 year-old academic publisher

Target markets: Institutions and individuals

Editorial focus: a diverse list that includes: Humanities, History and Science From scholarly monographs to trade titles for a

general audience

Growth strategies: Introduce new products (digital and print) Publish more titles (front and backlist) Target new markets

Deliberate Approach to Digital Products

3

Development of digital product strategy as starting point

Content assessment Understand markets and customers for digital products

Prioritization of opportunities eBooks as an additional format Curated collections Enhanced eBooks Digital distribution

Critical to consider implications to staffing and infrastructure

Economic Drivers – Print v. Digital

4

Digital

CostsCosts

RevenueRevenue Subscription Perpetual access Pay-per-view Aggregated and

Disaggregated content

Different kinds of editorial, production, sales, fulfillment

Platform and development Digitization and encoding Customer service (3rd

party)

Print

Individual book purchases via booksellers

One time payment via wholesalers (institutions)

Editorial costs Book production Sales and marketing Warehouse and fulfillment

Key Considerations for Digital Products

5

Size of digital product (corpus v. single work)

Semantic markup (interpretive v. structural)

Permissions (availability of worldwide digital rights)

Multimedia and interactive enhancements (complex v. simple)

Design (comprehensive design layouts v. format redesign)

Platform and IT investment (custom development vs. modifications to existing systems)

Example of Print P&L

6

Working Column Proposal EdComProject Description & Estimated Timing

Date of input 03/03/10 04/01/09

Approval Stage Completed Turnover EdCom

Acquisition Editor

Author (last, first)

Title

Job number (5 digit number) 18331N

Translation No No

Import No No

Imported from whom?

Contract signing date 06/04/09 06/04/09

Contractual delivery date 12/01/09 12/01/09

Publication month (type "MMM-YYYY") Nov-2010 Dec-2010

List Fall 2010 Fall 2010

Discount Ac Trade Trade

Discipline African/Black Studies African/Black Studies

MetaDiscipline Cultural Studies Cultural Studies

Sales Discipline History History

Audience General Reader General Reader

Imprint Harvard University Press Harvard University Press

Who pays? HUP HUP

Updated by (initials)

Sales Projection

Initial 12-month Sales 2,000 2,000

Second 12-month Sales 0 500

Projected 24-month Sales 2,000 2,500

Advance Sales 1,000 1,500

Initial Print Run 2,000 2,000

Price $22.95 $22.95

Projected Avg Discount % 41% 35%

Projected Avg Net Price $13.54 $14.92

Author / Contract Decisions

Author Advance $7,500 $7,500

Royalty Rate % (Avg of First Year Sales) 10.0% 10.0%

Royalties calculated on: List List

Foreign Rights $0 $0

Author grant $0 $0

Subvention (income not expense) $0 $0

Marketing Expense $0 $0

7

Editorial & Production Decisions

Wordcount 33,388 30,000

Trim 5 1/2 x 8 1/4 5 1/2 x 8 1/4

Pages 200 200

Text Permissions Cost $0 $0

Artwork Permissions Cost $0 $0

Artwork Creation Cost $0 $0

Illustration count: b&w line 0 0

Illustration count: b&w halftone 20 20

Illustration count: color 0 0

Editing Method EdPro / Packaged In-house

Design Needs Format Format

Development Costs

Project management $0

Editing $0

Book design $0

Typesetting $0

Jacket design $0

Packager Fees $0

Pre-press $0

Translation $0

Total Development Costs $0

Fixed Costs per Page $0.00

Variable Costs

PP&B Cost (interim average figure) $3.25

Financial Projection Results

Example of Digital P&L

8

TI TLE:

AUTHOR: Perpetual AccessPUB DATE: Top UpEDI TOR: Single-Viewer eBookSERI ES: Multi-Viewer eBook

Year 1 Year 2 Year 3 Year 4 TotalMarket DiscountAcademic 0% 100 200 150 100 550Public 40% 25 25 25 15 90School 70% 50 50 50 20 170Consumer 70% 25 25 25 15 90Other 5% 0 0 0 0 0

Total 200 300 250 150 900

Year 1 Year 2 Year 3 Year 4 TotalMarket DiscountAcademic 0% 0 0 400 100 500Public 40% 0 0 25 25 50School 70% 0 0 25 25 50Consumer 70% 0 0 50 50 100Other 5% 0 0 0 0 0

Total 0 0 500 200 700

Year 1 Year 2 Year 3 Year 4 TotalRenewal % 77% 77% 80% 85%New Contracts $20,000 $40,000 $40,000 $40,000 $140,000Renewal $ $0 $20,000 $50,000 $80,000 $150,000Spread Revenue $10,000 $40,000 $80,000 $100,000 $230,000I mmediate Earning Revenue $0 $0 $0 $0 $0

Total $10,000 $40,000 $80,000 $100,000 $230,000

Year 1 Year 2 Year 3 Year 4 TotalMarket DiscountSingle Viewer eBook 50% 75 100 75 50 300Multi Viewer eBook 50% 150 200 100 50 500

% - - - - 0% - - - - 0

Total 225 300 175 100 800

$2,000.00

Perpetual Access Top Up: Units/ Discount Matrix

Subscription Earnings

eBook Aggregation: Units/ Discount Matrix

Perpetual Access: Units/ Discount Matrix

PRI CI NG

$5,000.00$500.00$1,000.00

9

Year 1 Year 2 Year 3 Year 4 Total$642,500 $1,142,500 $892,500 $577,000 $3,254,500

0 0 $214,250 $64,250 $278,500$10,000 $40,000 $80,000 $100,000 $230,000

$187,500 $250,000 $137,500 $75,000 $650,000Total Net Sales $840,000 $1,432,500 $1,324,250 $816,250 $4,413,000

Year 1 Year 2 Year 3 Year 4 Total$500,000 0 0 $0 $500,000

0% 25% 25% 25%$0 $125,000 $125,000 $125,000 $375,0000% 0% 0% 0%$0 $0 $0 $0 $0

Total Platform $500,000 $125,000 $125,000 $125,000 $875,000

Net Sales

Assumptions of the ModelNot modeling revenue from individual subscriptions; only individual perpetual accessSubscription Earnings $230,000 5%Not modeling data set licenses Single Viewer eBook $150,000 3%Subscriptions price ($1000) reflects a median price point. See tier structure in business plan.Multi Viewer eBook $500,000 11%Perpetual is priced at 5 times the average subscription. See tier structure in business plan.Download Earnings $0 0%Licensing includes hosting Perpetual Access Academic$2,750,000 62%Not modeling print sales Perpetual Access Public $283,500 6%

Perpetial Access School $76,500 2%Consumer $144,500 3%P&H $0 0%Top Up $278,500 6%Total $4,413,000 100%

Cost of Sales

Platform $875,000 20%

Royalty $1,103,250 25%

Other Costs $250,000 6%

Total $2,228,250 50%

GROSS MARGI N $2,184,750 50%

Gross Margin %COMMENTS

Online Development

Platform and DevelopmentSoftware License %Software License $

Web Hosting $Web Hosting %

Net Revenue Top UpNew Revenue SubscriptionNet Revenue eBook Aggregation

Sales

Net Revenue Perpetual Access

Financial Outlook: Year 1

Revenue $27,081

Fixed Direct Costs

Advance to Author $7,500

Rights, Subvention, Marketing $0

Artwork & Development $0

Total Fixed Direct Costs $7,500

Variable Costs

Royalties beyond the Advance $0

PP&B Cost $6,500

Total Variable Costs $6,500

Resulting Gross Margin

Gross Margin $ $13,081

Gross Margin % of Revenue 48%

Consider for Subsidy? No

10

Summary and Key Take-Aways

11

Focus on digital product strategy Understand content depth and market opportunities

Plan for iterative development Need to adapt to industry changes and learnings Revenue models still not clear (as compared to

costs)

Consider staffing and infrastructure implications

Questions:

12

1. What types of products beyond eBooks is the market interested in

2. What other tools have people found to be successful

3. Cannibalization and Piracy – any experience

4. What success are people having digitizing out of print backlist

Appendix

13

Digital Consideration Matrix

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DIGITAL PUBLISHING PROJECT UNDER CONSIDERATION Acq. Ed: Action Requested: Date:

Author, Title, Affiliation:

Project Title:

Dev. Ed. MS. Ed. Prod. Ed. IT Pub date:

Ed/Prod/IT maintenance level

Highest High Low Lowest

Editing for Digital Format

Developmental (structural)

Moderate (substantive)

Light (style)

None (proof-reading)

Multimedia and Interactive Enhancements

HUP develops or Au supplies complex/many

Au supplies some, average complexity

Au supplies few, simple

None

Semantic Markup

Interpretive, Close Reading

Entities and Cross-References

Mostly Structural None

Platform and IT investment

Custom Development

Modified Standard Out-of-the-Box

Size Large Corpus Mid-sized Collection

Small Group Single Work or Sub-work

Permissions HUP assesses, requests, and monitors

Au assesses and requests many, advice from HUP

Au assesses and requests few, advice from HUP

None

Design

Comprehensive design layouts/ High-profile trade

Many text elements/ Trade or academic trade

Few text elements; format design possible/ Professional

Format design / Text

Metadata

From Scratch Supplementing and reformatting

Minor reformatting

None

Source From Scratch Print, motley digital

Uniform digital Formatted

Schedule

Immediate (ie. 6 weeks)

Near Term (ie. 6 months)

Lead Time (ie. 1-2 years)

Long Range (ie. 5 years)

Project Management

Full Time Part Time Occasional None

Author or Stakeholder

Major trade or Harvard au

Other significant or past trade au

Senior scholar Junior scholar

Investment Price Sales Income Please list any roughly comparable digital projects: Title Notes 1. 2.

Summarized Digital P & L

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Net Sales

Subscription Earnings $230 5%

eBook $650 14%

Perpetual Access – Academic $2,750 62%

Perpetual Access – Public Library $283 6%

Perpetual Access – School $77 2%

Consumer $144 3%

Top-Up $279 6%

Total $4,413 100%

Cost of sales

Platform $875 39%

Royalty $1,103 50%

Other Costs $250 11%

Total $2,228

Gross Margin $2,185 50%