The Great E-book War

Books were pulled from Amazon this week in a dispute with publishers over the price of e-books. Nicholas Ciarelli on why the book industry is making the same mistake as the record labels.

A long-running dispute between and the publishing industry turned into all-out corporate war this week, complete with boycott threats, irritated authors, and the hasty removal of a publisher's entire catalog from Amazon's shelves. The matter at hand: e-book pricing.

The ugly chain of events followed Apple's announcement of its own e-book store for the iPad on January 27. After partnering with Apple, major publishers descended upon Amazon's Seattle headquarters to demand a big concession from the online retailer: the ability to set their own prices for e-books. For new releases, the publishers plan to raise those prices to $12.99 or $14.99, a hefty increase from the $9.99 Amazon presently charges for most books.

For many people who buy e-books for their convenience, though, the choice isn't between buying an e-book or a physical book, but rather between buying an e-book or no book at all.

While the issue is a fairly mundane pricing disagreement, its results will be felt by anyone who buys an e-book, including both future iPad owners and the projected 3 million consumers who will purchase Amazon's e-book reader, the Kindle, this year.

The skirmish has also revealed the publishing industry's grand strategy for e-books: discourage people from buying them. With physical book sales declining and e-books going gangbusters, publishers worry that Amazon's $9.99 e-books are cutting into sales of new hardcovers. The industry's latest maneuver, then, is a move expressly intended to protect its traditional business. Whether it will also evolve into an actual strategy for e-books remains to be seen.

John Sargent, the chief executive of Macmillan, presented the new pricing arrangement for e-books to Amazon's top brass on Thursday, January 28; under that model, termed the "agency model," Macmillan would set the prices for its own e-books and give Amazon a 30 percent commission on each sale. Sargent returned to New York the next day to discover that Amazon had retaliated by removing the "Buy" buttons from all of the publisher's books, electronic and physical—a fairly obnoxious tactic that earned the retailer no fans among Macmillan's authors or many readers. On Sunday, Amazon surrendered and announced in a blog post that it would accept Macmillan's new terms, stating: "We don't believe that all of the major publishers will take the same route as Macmillan."

So much for that prediction. On Tuesday, Rupert Murdoch, whose News Corp. is the parent company of HarperCollins, said that Amazon "is now ready to sit down with us again and re-negotiate pricing." And on Thursday, Hachette Book Group announced that it would pursue the agency model as well. Macmillan's physical books were restored to Amazon on Friday night, and at book-industry conferences just mentioning the publisher's name is evidently enough to garner a standing ovation.

This whole sorry affair—"one of the craziest weeks in recent memory for publishing," wrote GalleyCat, an industry blog—was largely instigated by Apple, which in its efforts to launch a new e-book store has apparently been more accommodating of the publishers' demands. (It's an unusual role for Apple. The book publishers should call up the record labels, which have found the company to be a frighteningly aggressive negotiator.)

To confuse matters further, Amazon presently pays publishers more money per e-book than it would under the new model. Amazon buys e-books much in the same way that it buys physical books: wholesale, paying about half of the list price of an e-book's physical counterpart. Amazon then turns around and sells that e-book for a retail price of $9.99, at a considerable loss. (Amazon is like Wal-Mart: It uses low prices to lure in shoppers and compete with other retailers.) Publishers are being compensated quite well under the current arrangement, but they're concerned that Amazon will eventually demand that it pay lower and lower wholesale prices so that it can support the $9.99 retail price. They imagine a future where Amazon has driven down the wholesale price for e-books so significantly that publishers can't generate enough revenue to stay in business. It seems like a rather unlikely scenario, but it has created some of the uneasiness in the publishing houses.

The industry's biggest fear, though, is that when Amazon sells a bestseller for $9.99, consumers will buy the e-book instead of the more expensive physical book. You can see why publishers might get this idea. When both versions of a book are available on Amazon, six e-books are sold for every 10 physical books. Hence the publishers' effort to move the prices of e-books closer to the prices of physical books.

The problem publishers will face is that e-books simply aren't the same as physical books, and consumers know this. Unlike with physical books, you generally cannot lend an e-book to a friend or resell it after you're done; everyone has to buy their own individual copy. And e-books provide efficiencies to publishers that simply don't exist in the physical world. E-books never go out of print, and once an e-book is listed in the Kindle Store, there's no marginal cost to sell another copy.

Moreover, publishers may have a difficult time explaining to consumers why Amazon should not be able to discount e-books just as it discounts other books. At time of writing, Amazon is selling new hardcover copies of Going Rogue for $13.50. Will consumers accept e-book prices of $12.99 or $14.99 for the same work? Kindle owners already routinely boycott books that are priced higher than $9.99.

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The fact is that publishers do not need consumers to embrace higher prices because this move isn't intended to sell e-books, it's intended to sell more physical books. For many people who buy e-books for their convenience, though—for the ability to take a dozen e-books on vacation, or to read a novel on a cell phone—the choice isn't between buying an e-book or a physical book, but rather between buying an e-book or no book at all. It's a reality faced by other industries that have moved online; if the record labels were to pull their music from iTunes, young consumers wouldn't rush to a music store to buy CDs instead.

The correct path for the book industry isn't clear, but eventually publishers will need to set a plan for e-books that is both sustainable and satisfies consumer demand. In their scuffle with Amazon this week, there's reason to believe that publishers have yet to arrive at that strategy. And until that time, e-book buyers should get their wallets ready.

Plus: Check out Book Beast, for more news on hot titles and authors and excerpts from the latest books.

Nicholas Ciarelli is the former publisher of Think Secret, an Apple news Web site. He currently works on the product team at The Daily Beast.