A case study of the economics of POD books: http://www.fonerbooks.com/pod.htm
Article Summary: POD books cost slightly more to print, but this is made back in a couple of ways. One obvious one is to cut out the middleman and sell direct to the customer though the author's web site or something. However, in the case study direct sales accounted for only 20% of sales. The rest of the POD business model derives from the fact that apparently POD books qualify for "short discounts" from distributors, which means in this case that they (Ingram, the distributor) charge the publisher (Foner) only 35% of the cover price to distribute the book to Amazon, B&N, etc., instead of the traditional 55%. I haven't been able to understand why Ingram would do this, but it must be that POD books are somehow cheaper for Ingram to distribute, possibly because of higher throughput (since POD books are, by definition, in demand and therefore a quick sell). That lets the publisher absorb the higher printing costs of POD books and still retain the normal 45% of cover price as net revenue. The publisher in turn spends less on overhead (less warehouse space required, less cash tied up in inventory) and is potentially able to pass on a larger royalty to the author. (Paperback royalties typically average 4% to 7.5%.)
Max's inference: if authors get a larger share of the revenue, that means they need fewer readers to support their writing habit. If you require ten million fans buying your books to make a decent living because you get a one-cent royalty per book, you pretty much have to write pulp and appeal to the lowest common denominator. If you get a $2.00 royalty per book, on the other hand, 5000 loyal fans can support you, and of course it's many, many orders of magnitude easier to acquire 5000 loyal fans than ten million. (Fan distributions are logarithmic.) That lets "niche" authors exist. It don't matter none if almost nobody wants to read my retro-tech adventure stories about coal-miners-turned-steampunk-inventors, as long as somebody does and I can connect with those somebodies. That's probably good for the future of literature, if you're willing to wade through the piles of offal produced as a byproduct (per Sturgeon's Law) or at least wait a century for the good stuff to rise mostly to the top. It's also good for me as a reader, because if I like a certain author it turns out that my buying habits can have a non-negligible influence on his desire to keep writing the kinds of stories I want to read.
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Be witty if you can,
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