The e-Book Pricing Battle

The following is a brief history of the e-book pricing battle that has been taking place. The passage quotes heavily from three articles:

“Publishers, Amazon in Flux in e-Book Pricing Fray” by Phil Wahba and Alexandria Sage, Reuters  

“Amazon Looking Foolish in e-Book Flap” by Therese Poletti, MarketWatch

“Cost of an E-Book Will Be Going Up” by Motoko Rich and Brad Stone, NYT

Being first to market, Amazon established a $9.99 e-book pricing model.

Amazon was first on the market with an electronic book (e-book) reader (e-reader), the Kindle.  Being first to market and having a large market presence together provided Amazon with enough leverage vis-à-vis publishers as to be able to establish a low, fixed sales price of $9.99 for all sales of e-books to Kindle users. This single, low, fixed price for all books is analogous to Steve Job’s iTunes music store pricing model, which initially sold all songs for 99 cents each.

Understand, though, that Amazon pays publishers about half the list price for books.  So if the list price of a new release hardback is $27.50, then Amazon loses about $4 on each $9.99 title it sells.  Why sell books below cost? Amazon has been trying to quickly build a dominant position around its sprawling e-bookstore and tying the Kindle to that store. It sells its e-books as loss-leaders, according to Wall Street analysts. Its tactic has been to head off Apple's anticipated entry into the e-book market by offering digital best-selling books at very low prices, propelling its Kindle reader to dominate the market.

Apple’s entry into the e-book market with its iPad e-reader has decreased Amazon’s market power.

Now Apple is entering the e-book market with its iPad.  In contrast to Amazon’s fixed, low price of $9.99 for all titles, Apple negotiated with publishers to sell e-books for its iPads at higher sales prices, ranging from $12.99 to $14.99 per title.

The emergence of a potentially strong distribution alternative in the form of Apple's iPad has given publishers the much-needed leverage to demand a change in the low, fixed-price book model Amazon has been using for the Kindle.  Publishers have feared that low e-book prices will generally devalue books and additionally cannibalize sales of its higher margin hardcover books.

Book publishers are now transitioning to an “agency model” for e-books.

The agency model transfers the retail pricing power to the publisher and gives a fixed cut to retailers.  More specifically, the publisher establishes the price for each e-book, and the distributor (Amazon or Apple) takes a 30% distribution fee.

The increase in e-book prices from $9.99 to $12.99 - $14.99 has caused a backlash from current Kindle users.

Just what e-books are worth is a matter of debate.  Some e-book buyers say that since publishers do not have to pay to print, store or distribute e-books, they should be much cheaper than print book.  However, publishers argue that printing and distribution represents a small proportion of the total cost of making a book.  To consumers who do not pay much attention to the economics of publishing, though, such arguments are trumped by the fact that e-books have been available for $9.99 for more than a year.

With higher e-book prices users of e-readers may instead either resort to piracy and/or forgoing reading altogether in favor of other activities.