H.Lime, you are correct, the “win” I have given to Amazon is not as stunning as the title of this piece suggests, for the reasons you write. However, I do know that Amazon has been wondering how they’d make money off eBooks in the long run since the devices aren’t getting much cheaper to make (even though eInk production is getting better scale all the time, the displays are still oversold). In fact, insiders whisper to me that Amazon had been discussing an agency model with publishers for some time, but wanted the freedom to set prices in response to demand (as online retailers are accustomed to doing). The Macmillan move just forces their hand and allows the publishers to learn first hand that they don’t have good demand-based pricing skills. In the long run, I think publishers will learn that not responding to demand hurts them (because some publishers will ultimately do it, forcing the industry to deal with the pricing disparity). This will have the effect I describe: prices come down, Amazon still makes money, yet eBooks are sold a prices that are close to what Amazon would have preferred anyway.

DM: You are exactly correct and this nuance is not lost on me (I already read Kindle and Nook books on 3 platforms each). What I was referring to was a ePub-driven world in which you buy a single format which is interoperable. I personally think consumer demand for such a world will never materialize, for exactly the reason you imply: we will already have a form of portability that far outstrips what we have today with paper. Consider this: when did you last buy a paper book from which you could transfer the content to a different book? Never. It’s not possible. You buy one copy, you’re stuck with that one copy. With Kindle or Nook (or Kobo) books, you do not face this analog constraint.

“So you can’t buy a cheaper e-book from one store and use it on the device of your choice.”

This isn’t really accurate. The big difference for the iPad is that its a hardware device that can run ebook-reading apps. Amazon already makes a Kindle reader for the iPhone, which will surely be optimized for the iPad—so you can read your Amazon-purchased ebooks on the iPad. It wouldn’t surprise me if B&N releases its own “NookBook” app for the iPhone to ensure they get a piece of the iPad pie.

People comparing the Kindle and the iPad keep forgetting this fundamental difference.

McQuivey does a great job of showing that Amazon stands to make more money PER E-BOOK under the agency model, but I’m not totally convinced Amazon is the winner here.  Amazon clearly doesn’t see it this way. 

Amazon certainly hopes that the “head start” ric mentions above will lead to long-term dominance in the e-reader/e-book market.  Recall that Apple carefully controlled the pricing for songs in the iTunes store, not to make more money on songs, but to increase the appeal of the iPod and iTunes, and to capture as large a market share as possible.  Of course Apple captured a huge market share, and they won most of the battles with record companies.  Amazon is trying to do the same thing, especially before more competitive devices come out.

I agree that as the iPad and other e-Readers—and their distinct or common stores—come out, price competition should eventually drive prices down, but the war is going on now.  As these new devices and stores try to gain in the market, it’s in Amazon’s interest to fend them off with low, consumer-friendly pricing, especially now that we know that the iPad will have higher prices. 

A related point to make is that, while Macmillan may make less money PER E-BOOK with this new model, this is not the publisher’s only concern.  Macmillan wants to protect the market for physical books.  It’s been pointed out above that consumers are willing to pay relatively high prices for e-books if regular books cost enough more—shouldn’t this price relationship between media work in the other direction as well? If e-book pricing is low enough, it should cannibalize physical book purchases.  If I can buy a physical, DRM-free copy of a new release that costs a few dollars more than the e-book version, I just may.  If I see that the e-book is incredibly cheaper, I’m more likely to think about getting a Kindle instead.

James is spot on! Amazon wins a limited victory but they both lose the war. Their greed is is only topped by their stupidity! Ebooks are not the dominant form YET and any squabbling now just muddies the water and in Amazons case diminishes the head start they worked hard to get! When someone solves the interoperability issue with content then I will - as a geek and voracious reader - get on board! But not until then and you best be assured I am not paying the same money for a ethereal, use hobbled, non-physical DRM laden digital file compared to a to a do as I please physical book! Not going happen! Be glad to get my $10 someday and be even more blissful that you dont have to settle FOR LESS! Greedy Bastards!

“The truth is, however, that the $12.99 -$14.99 represents the exactly right price point for ebook versions of new hardcover releases, from both a publisher and consumer perspective. At that price range, roughly a 52-54% discount from standard hardcover prices of $25.00-$35.00, the publishers will make the equivalent unit gross margin that they make on their current hardcovers, about $6.75 per copy. They can accomplish this because of several factors:.... at that point of indifference, the hardcover publisher ceases to worry about the potential cannibalization effects of simultaneous e-book release.”

From the stand-point of the publisher this is sublime, it affixes unit GM of hardcover sales with that of ebook sales.  Beautiful.  But how sure are you on the ‘perfect price point’ for consumers as well?  The crux of your ‘sell’ is centered around the discount % as compared to current MSRP’s of $25-$30.  Trouble is, most feel those price points(articles author included) are way too high, and as mentioned, most people don’t pay ‘list’.  In fact, that 12.99-14.99 probably is either at, or only a few dollars short, of what most people are paying for hardbacks. 

Amazon’s $9.99, with it’s simple, price-psychology appeal of ‘you’ll buy three at 9 bucks compared to one at $15’ wedded to stability, would seem from a non-scientific standpoint the safer bet as to consumer expectation.  Of course with that the publishers equation from your argument is lost.  You do say your company has done polling on this issue, but is it fair to wonder if the ebook/digital delivery developments are so relativity new, and the book market so diverse, that data/trending outcomes can be especial hard to predict as to mainstream purchasing expectations?

Again, a wonderful equation if it works, but it does carry the air of a Publisher/Manufacturer explaining to the customer how beautifully everything would work if the customer just paid them what they (the Publisher/Manufacturer) wanted. 

Nigelht, I agree that the iPad will be a force to be reckoned with, but not in this calendar year. Because even if it sells really well this year, the Kindle’s owners will read 2x as many books as iPad buyers do. Many iPad users won’t read a single book, and those that do read, won’t read as many as Kindle readers do (it’s a definitional thing, you’re either in that camp of people who read voraciously, or your not, for the former, the Kindle does an outstanding job at half the price and is integrated with the most popular bookstore in the world). However, in 2011, the iPad will likely get a software fix that will make it more optimized for reading and some of the pricing issues will have diminished, at which point Amazon may suffer compared to Apple. Unless it can build its own tablet by then…

I think you badly underestimate the market position of Apple.  Ignoring iBook for the moment there probably were as many Stanza app users on the iPhone as Kindle device users when Amazon bought Lexcycle.  With Apple picking up the ePub standard a year later Amazon’s end run has failed and will be looking at huge competition.  I wouldn’t be very surprised if the iPad does 5M units in the first year.  Even if only does the 2M sales you expect that’s roughly equivalent to current Kindle market. 

And while some folks prefer eInk there’s a lot of us that don’t care (as evidenced by the Stanza users) even on the tiny iPhone/iPod touch screen.  The fact that the iPad is a multifunction device trumps eInk resoundingly.

With $4B in the bank and 2 years of head start and Amazon blew it by not making the Kindle cheap enough to become mainstream and pissing off publishers at the same time.  Letting Apple have any window of opportunity in an area is a seriously bad idea, triply so if your primary content providers are rooting for them to succeed against you because you’ve been bullying them about.

bookateaur, I don’t disagree and as I have said elsewhere, in a mud fight, everyone ends up dirty. And as I mentioned in my piece, our own research shows that people would gladly pay more than $9.99 for an eBook as long as the hardcover version is more expensive. The problem is—as Amazon knows well because of its own prices—hardcovers sell in the same price range as the proposed eBook prices. That is what will ultimately make this unpalatable to consumers.

In the meantime, Amazon now has what it has always wanted: a way to make money from eBooks, thanks to the “pressure” applied by Macmillan. Now Amazon can put the blame on publishers for pricing, but work hard to make the Kindle experience amazing nonetheless. That’s why I think they have it within their power to turn this situation to their financial and market advantage.

Books cost money to print, bind, ship and store.  These costs come from the $25 price point and are getting more expensive every year.  ebooks have little or no distribution cost and therefore warrant a significant discount.  I can’t share my ebook, I can’t donate it to my library where it will be read hundreds of times for no fee to the author or publisher.  So an ebook should be very cheap.  The Amazon model made sense.

The publishers have lost their minds and look at ebooks as a gold mine and not a new method to distribute the authors work with reduced cost and overhead.

I think it more than a bit of a stretch to call this a flat-out victory for either party. Despite its feigned martyr’s pose (in Saturday night’s so-called “capitulation” letter), Amazon has suffered a public relations debacle among some very important constituencies: authors, agents, and disaffected Kindle readers.  I don’t include publishers in that line-up because they have become well accustomed to Amazon’s hardball tactics for years. Amazon effectively has had to abandon its loss-leader pricing strategy at a point well before Kindle sales have reached a mainstream tipping point.  Publishers effectively will now have to abandon up their declared windowing strategy, and suffer some top line revenue erosion as an increasingly significant porton of hardcover sales slip over to lower-priced ebooks.

The truth is, however,  that the $12.99 -$14.99 represents the exactly right price point for ebook versions of new hardcover releases, from both a publisher and consumer perspective.  At that price range, roughly a 52-54% discount from standard hardcover prices of $25.00-$35.00, the publishers will make the equivalent unit gross margin that they make on their current hardcovers, about $6.75 per copy.  They can accomplish this because of several factors: 1.) the agency model pays them 70% of list price vs. standard retail discounts of 50%; 2.) ebook royalties are established, for the most part, on 25% of net receipts vs. 15% of list for hardcovers which yields a lower per unit royalty; 3.) the ebook has no physical manufacturing cost, a pick-up of another $2.00; 4.) the ebook entails no physical distribution costs (packakging, order picking, shipping, etc.) for a gain of roughly $1.00-; and finally, 5.) the ebook sale is a guaranteed one, affording no risk of return. Why is this gross margin equivalency, new e-book vs. hardcover, so critical?  Because at that point of indifference, the hardcover publisher ceases to worry about the potential cannibalization effects of simulatneous e-book release.

The consumer wins because the publishers’ need to engage in windowing is effectively over, except in very rare instances, e.g. very time-sensitive nonfiction releases.  Our research shows that as many current e-book buyers are prepared to pay in the range of $12.99 -$14.99 as are represented by the $9.99 fanatics—about 28%. (See http:// www.versoadvertisng.com/survey/). Of the remaining cutsomers, 37% have no fixed opinion about ebook prices and as are likely to be converted to the $14.99 prices as not.  Publishers now have the incentive to invest in quality formatting of all their ebook product (the current quality of scanned ebook product is atrocious), experiment with new enhanced ebook content,  and spend the necessary dollars to perfect their internet marketing channels.  I would call this a win/win for consumers and publishers, hands-down.  Those $12.99 - $14.99 prices are likely to be around for some time as a result.

The only real loser is Amazon in its monopolistic ambitions.  But it too will benefit in the long term from the heightened publisher interest in expanding the ebook market, and in the short term by actually making money on its ebook sales, as Mr. Mc Quivey rightfully points out.  As has always been true, publishing is best served by a strongly competitve and diversified distribution ecosystem.