What you are missing from the argument is that the reason the publishers existed was not for the ancillary services, but because of the huge capital costs of running a printing press and moving that object down the production chain to the network of distributors and retailers. If we can accept that the printed book is no longer the primary artifact, we can accept that we no longer need huge publishing houses to wrap all of the costs in.
The cost differences between producing a paper book and an eBook are striking to me. I read the linked article and it makes some imaginative leaps in assigning all costs to the eBook venture, resulting in some ridiculous numbers. If you compare the costs of physically printing the book to publishing an eBook, there is obviously a huge difference. Look at lulu.com for starters on this.
On the other hand, his argument for flexible pricing is quite sensible. The difference as we go to eBooks will be that the popular books will cost more, and the less popular books will cost less, as we get the physical production costs out of the way and the overhead is greatly reduced.
Just like recording artists and labels, authors will separate from publishers, as publishers fragment into the the physical production, editorial service providers and financial risk backing operations.
I'm actually trying to make the opposite point, which is the physical cost of a book is relatively unimportant. LuLu actually throws you way off. They quoted me $7.95 for the cost of a 300 page perfect-print edition. They are a small volume printer, <1000 copies. At Volume (2000+ copies), a perfect-print 300 Page book can cost as little as $2.50 - And there are, and always have been, a lot of printers that could that work for you. You are correct in indicating that the big publishing houses have access to scale and vertical integration in which they are probably paying around $1 for each book - but, at 2000 copies, $5000 vs $2000 doesn't matter very much when you consider all of the fixed costs associated with a book.
Where a big publisher CAN take advantage of their scale, is in spreading the risk over thousands of books. Sure, a lot of their $5K advances will yield a grand total of 75 books sold. Or, in fact, be completed but not published (Seen that happen). But, many of those books will break even, some will make a profit, and every so often, JK Rowling will show up.
Note - a private publisher is risking everything. If their 3-4 months worth of heartfelt effort turn out to sell 70 books at $10, and they get to keep all of it, well, 100% of $700 is still less than an advance of $5,000.
Almost all of the time, energy, risk(!) and money associated with creating a book come before the actual physical creation. I'd be prepared to say that for a 5000 book run, (which is considered a success, for most authors), approximately 90% of the cost is associated with the creation of the book, advertising, marketing of the book, and only 10% in the manufacturing of it.
Now, where we can reduce costs is in the marketing/advertising - with eBooks, you don't really need shelf space. And Social Networks/intelligence engines can do a better job of getting me the book I'm interested in anyways.
But, to create a great book, requires a team of professionals. And those people have to eat....
[edit: And, to steal a point from retric above, "What publishers focus on is not high quality books but rather figuring out how to convince people to buy crap books that they will not actually read." - That's true, the other strength of the Publisher is controlling the channel, aka the bookshelf in the past. But, given that there is no "bookshelf" to control anymore, hopefully great content will rise to the top, and that is yet _another_ inefficiency that we will be able to eliminate ]
I predict that the extent to which this turns out to be false will surprise us all.
Shelf space at a bookstore is the primary advertising medium for books. Most people don't consult the New York Review of Books. Most people see very few book advertisements. Even those of us who do most of their book buying online still wander through bookstores and libraries. Physical objects have a powerful draw. I buy almost all of my computer equipment online, and yet I still find myself wandering through the Apple Store, just to experience the physical presence of computers and computer users.
Dedicated physical bookstores are going to get even harder to keep open. They might get smaller. They might continue to diversify until they're basically cafes with books lining the walls, or small performance spaces where authors gather to hold readings, or something. But I suspect that, somehow, the biggest and most successful publishers will continue producing copies of physical books and putting them on shelf displays in places where readers are likely to gather, just to get those books in front of people's eyes at the exact moment when those people are in a book-browsing mood.
Then they'll sell electronic copies. Right there in the store. Barnes and Noble apparently agrees with me: They're plugging the Nook front and center in their brick-and-mortar stores.
Or, maybe I'm wrong. It will be interesting to see how it plays out.
PS: To anticipate every reader's first objection to my wacky hypothesis: This didn't save the music stores because music is inherently unbrowseable in a store. Music stores used to have little listening stations with headphones, but did anyone ever actually use those things? They never had what I wanted to hear. The iTunes store blows that experience away, to say nothing of Pandora or YouTube or a filesharing network.
Actually, I think you missed my point. I was talking about the historical reasons that publishers came into existence. At that point in time, it was (and still is) a huge expense to run a printing press and book bindery. Then, they took control over the distribution channel. These are huge costs- Lulu doesn't get your book into B&N. I was speaking to a future where bookstores are as rare as record stores as one where those costs are not significant.
It is just a historical accident that the people that control the printing presses control the rest of the process. It used to cost quite a bit. With on demand printing, there is little need for their services.
"In the 1800s, or early 1900s, there was massive capital required to print a book. As a result, the books that people bought, came from those who had capitalized the printing presses. Now a days, the publishers are historically tied to those large printing presses, which really are less relevant with inexpensive on-demand printing. "
But this overlooks that you don't need to _own_ a printing press to have your book printed/bound.
Every town I've ever been in has had several printing companies that would do all types of printing jobs for you. Including your book and binding, if you were so interested and actually had a need for 5,000 of them.
LuLu, btw, is the _counter example_ to this. They are hugely expensive, but convenient for very small print runs.
Yes, large book publishers can print a 300 page book for $1, whereas it will cost you $2.50 to do so at your local printshop, but the real risk is the fact that you probably spent 4 months of your life writing a book, and paying people several thousand dollars to edit/proof/provide art, all for a book that may sell 70 copies @ $15.
I think we do agree, that (one) real value of publishing companies has been their ability to control the channel (book stores). I think we differ on their importance in developing books (Copy Editors, Editors, Proof Readers, Designers, Artists). I don't think you've commented on the publishers ability to spread risk over thousands of authors (and also pick the good ones!)
Now, authors still need book shelf space _today_, as ebooks do not yet dominate. This is why a famous and well known author, with their own brand, would stick with a publisher when they already have a brand. They need the channel. I like your quotation "Lulu doesn't get our book into B&N." :-)
But, Peter Hamiliton or JK Rowling are in the drivers seat. Unless they've been tied down with contracts that prevent them from going elsewhere, I would think that, right about now, they would start to realize they can go their own. They don't _need_ a publisher. They can personally hire their own editor, copy editor, proof reader, design, and artist, and self publish. Why more famous authors don't pull a Stephen Covey is beyond me.
The cost differences between producing a paper book and an eBook are striking to me. I read the linked article and it makes some imaginative leaps in assigning all costs to the eBook venture, resulting in some ridiculous numbers. If you compare the costs of physically printing the book to publishing an eBook, there is obviously a huge difference. Look at lulu.com for starters on this.
On the other hand, his argument for flexible pricing is quite sensible. The difference as we go to eBooks will be that the popular books will cost more, and the less popular books will cost less, as we get the physical production costs out of the way and the overhead is greatly reduced.
Just like recording artists and labels, authors will separate from publishers, as publishers fragment into the the physical production, editorial service providers and financial risk backing operations.