E-books have to become cheaper: opportunities and risks of lowering VAT

The e-book has to get cheaper. The planned reduction in VAT could provide impetus for this. For many publishers, however, the temptation should not be to lower prices. That would be a fatal mistake.

The Ministry of Finance has published a bill that will reduce the VAT rate for e-books from January 1, 2020 from 19 percent to 7 percent. The template for this was provided by an EU directive on the structuring of VAT. Now one thing is important for the book industry: publishers have to lower their e-book prices so that sales increase and the industry benefits more from digitization. The intermediate trade in the classic book world is reducing the margins of publishers and authors, the digital sales structures are more cost-effective and eliminate the intermediate trade. Everyone benefits from this: readers, publishers and authors and, under certain conditions, the book trade.

How the book trade works

The book trade is a very traditional industry, still organized in clear trade structures: the trade buys in one of the large bar ranges, a kind of wholesaling for the book industry, publishers deliver to the bar range and rarely directly to the trade. While the book trade receives lower discounts for purchases, the publisher sells to the intermediate trade with high discounts. A purchase discount of up to 50 percent is not uncommon in the industry, depending on the sales price. This reduces the margins – one of the reasons why many publishers are now using e-book sales to pour the income into their coffers.

Why publishers don’t want to lower their prices

Nobody will cut prices after a VAT cut. How so? Short answer: because there are so many middlemen in the book industry in the analog world that this reduction in VAT in the digital world will only improve the margin, not the sales price. The temptation is simply too great to view the cut as a stimulus package for publishers.

Publishers that have found a working price point will not voluntarily lower prices. This would be understandable for small publishers and self-publishers. These market participants already set their prices significantly lower than the rest of the publishing world and mostly scratch the subsistence level.

For large publishers, however, the rule of thumb of the 20 percent discount on e-books compared to the print edition often applies. It has to be different now. Prices have to go down in order to make the e-book more attractive. That helps (almost) everyone.

Why the prices have to be lowered

Instead of seeing the VAT cut as an economic stimulus program, publishers should start their own economic stimulus program and lower e-book prices. In the free market economy, price cuts boost sales. So more e-books would be sold and the shares in the market would shift. More digital books mean more income for publishers and authors. (Author’s fees are also set higher for e-books.) An upswing in digital distribution would also reduce middlemen – which in turn benefits authors and publishers.

Since Germany also has a counterweight to Amazon’s self-publishing platform KDP with the Tolino Alliance, the self-publishing market outside of Amazon would also benefit indirectly from a general strengthening of the e-book market.

At first glance, stronger digital sales may have a negative effect on the book trade, but perhaps it would be time for the industry to ensure that the book trade benefits more from digitization. Few small to medium-sized booksellers sell e-books. That has to be different and the interlinking between the stores and the retailers’ online shops has to become more attractive and better.

Ultimately, everyone would benefit. Except for middlemen, but that’s the inevitable fate of middlemen in the digital world of online retail.

Disclosure: The author is also active as a publisher and self-publisher.