The variable cost for ebooks is quite close to nil, and so in a free market, one should expect that that variable cost difference would result in a discounted price for the ebook (which is what justifies the purchase of an ebook reader and connectivity charges). In a corrupted market, we’d see pricing similar to what we see now.

That’s the market question. The ethical question is what the “value added” is of the publishing house, and why they shouldn’t just be eliminated with author-direct options. I would think it’s the editing, the monetary advance for authors (mild financial risk-taking), and the digital production assistance. For most authors, it’s probably not the marketing help, but for some that would apply.

For most production industries, the OEM (original manufacturer… author in this case), makes about a third of the gross. In publishing, I understand the author makes much less than that, which would again be a sign of a corrupt market.

For instance, imagine a bestselling ebook that wholesales for $14.99 and both Apple and Amazon discount it to $9.99. Assume each retains their current market share–roughly 10% and 70% Both lose $5 on each sale, but the similarity ends there.

Apple sells 10,000 copies losing $50,000. With about $100 billion in the bank, that’s nothing. Also Apple can write off that loss as a way to increase the highly profitable sales of their iPads. It only needs to sell about 500 additional iPads to recoup the cost of those 10,000 discounted books.

Amazon sells 70,000 copies, losing $350,000. With its tight profit margins, that hurts. And it can’t write off that loss with profits from sold-at-cost Kindles and given-away-for-free Kindle apps.

Notice the key difference. While both get the same marketing edge with their competitive discount–”we have the cheapest ebook prices,” only Apple is in a position to make money in this battle.

There are reasons for that:

* Apple’s business model has always been to use ebooks to sell their mobile devices. Ebooks from Apple only run on its highly profitable mobile devices. My hunch is that it can easily subsidize below cost ebook sales with addition iPad sales.

* Amazon’s business model is to subsidize device sales with ebook sales. It doesn’t improve their profits if selling more ebooks means more Kindle sales. It can’t make up losses on ebooks with those profitless Kindle sales.

* Finally, a savvy reader of many ebooks can easily figure out that the smart move it to pay a bit more and buy an iPad. If Apple’s ebook price is cheaper, buy from it. If Amazon’s price is cheaper, buy from it and use the iPad’s Kindle app. (The reverse isn’t true.) That means that Amazon’s $5/book loss is in many cases subsidizing the sale of iPads.

I’d wondered why Apple wasn’t creating ebook readers for any other platform, not even Macs. Now I think I know why.

Amazon may live to regret encouraging the DOJ to go after Apple and the Big Six publishers. As the dominant ebook retailer with the best ereaders and ebook ecosystem,, it already had a major advantage even though agency pricing meant it couldn’t sell for less than its competitors. That 30% markup on most titles was a very good thing, and may be something Amazon execs look back on with longing. But that isn’t all.

Amazon’s real goal, many believe, was to sell below cost to destroy competitors, Then it would own the market and could set any price it liked, most probably forcing publishers to sell to it at very low prices. Amazon, with only a data download and a financial transaction to pay for, can make money on low prices much easier than publishers.

If Apple choses to match Amazon’s price cuts, Amazon is in a game it can never win. Longterm, Amazon is likely to find their ebook losses unsustainable, while Apple is likely to find that its losses are more than made up by increased iPad sales.

And those increase iPad sales mean fewer Kindle and Samsung sales.

With respect to their arguments about having to maintain different software for the different publishing formats, there is a simple answer to that. Don’t!. Standardize the format and if a retailer wants their own proprietary format make them do (and pay for) their own conversions. That, by the way, would have the side benefit of taking away some of Amazon’s power in the marketplace.