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No more cheap Kindle books?

prettyipadJPG.JPGSteve Pearlstein describes how the Kindle's business model will probably fall in the face of Apple's challenge:

Amazon's business model was, in fact, the reverse of the one used so successfully by Gillette, selling razors at little or no profit but making it up on high-margin razor blades. In this case, the $9.99 retail price for the books (the blades) was actually less than the $12 to $14 "wholesale" price Amazon paid to publishers. That loss, however, was made up for by the high profit margins on the Kindles (the razors), which sell for $260 to $490.[...]

And then Steve Jobs showed up with the iPad. Apple's new $500 tablet computer can do almost everything a Kindle can, and much more. And to the delight of publishers, he was offering not only 25 million new potential customers but also a new business model in which Apple would serve merely as a distribution agent for the publishers, rather than a wholesaler. Under this arrangement, publishers are free to set retail prices as high as $15 per book and pay Apple a flat fee of 30 percent of the price.

With a higher price for both the tablet and the books, you wouldn't expect this new model to pose much of a challenge to Amazon's dominance in digital books. But then, over the weekend, Macmillan told Amazon that if it didn't agree to the same terms it had hammered out with Apple, Amazon would no longer have access to new books from the publishing house until several months after they were released through bookstores and Apple. Amazon's initial response was to prevent users from buying Macmillan books on its Web site. By late Sunday, however, Amazon had raised the white flag and announced that it would go along with the new arrangement. Other publishers are now expected to follow Macmillan's example.

Photo credit: By Tony Avelar/Bloomberg

By Ezra Klein  |  February 3, 2010; 12:20 PM ET
Categories:  Books  
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Comments

I thought a competitive marketplace was supposed to bring prices down?

Posted by: mslavick | February 3, 2010 12:33 PM | Report abuse

I've stocked up on cheap Kindle books. No need to buy any. When we stop buying, maybe the publishers will back off.

Posted by: chi-town | February 3, 2010 12:39 PM | Report abuse

the kindle is such a one dimensional device. The tablet is not god's gift to geeks, but it is supposed to function more like a computer as well as being a text reader.

Posted by: srw3 | February 3, 2010 12:43 PM | Report abuse

I think true competition does bring the price down, but, here we have a publishing oligarchy.

...and giant distributors (30% skim? Apple is not looking to pass on the savings to customers.) This is why I get my back up when people bad mouth Sam Walton and the like; Sam and others passed the savings along, apple and the other true oligarchs do not.

Posted by: johnperney | February 3, 2010 12:45 PM | Report abuse

Short term, the publishers have the edge, because print books are still the most important publishing medium.

However, long term, eBooks are so easy to produce and publish, the price of entry to the market is lower. There is virtually no infrastructure necessary for publishing ebooks, just staff: editors, publicists, layout, some tech folks.

My mom wrote a novel in the 1990s for which she couldn't find a publisher. She sent me a Word file and I've converted it to a nicely formatted Amazon book in less than 8 hours time.

The world of publishing will change.

Posted by: thomasoa | February 3, 2010 12:53 PM | Report abuse

Wait a second.

If I understand what you've written (or quoted) correctly, publishers currently get $12-$14 for e-books, with Amazon taking a $2-$4 loss and making up the difference on the Kindle.

Under the Apple model, book prices can go as high as $15, but 30% of that - nearly $5 - goes back to Apple, netting the publisher only $10 or so.

So the publishers are withholding their books in order to force Amazon away from the $12-$14 per book model to the $15 per book gross / $10 per book net model? Higher prices for lower volume, and a lower net per book? There must be something missing.

How does this really hurt Amazon? Amazon goes from losing $2-$4 per book to making close to $5 per book. Consider the alternative - rather than changing the pricing structure, Apple could have imitated Amazon's pricing structure directly. In either case, Amazon doesn't get to offer cheaper books than Apple, but it's still going to be ~$250 savings to go with the kindle, and the kindle will have longer batterly life and will be readable outside. I haven't held the iPad, but given the cost of it and what I know about Apple products, I will be a lot more concerned about damaging the iPad than a kindle, and that will limit its use.

The only strong advantage the iPad offers is the backlit color screen, which I'll admit would be compelling at a similar price point but not for double the price. There are also the apps, but you could probably buy a kindle and buy an iPod touch and end up saving money or at least breaking even. The iPad is probably good enough to fill in for a computer in many cases, but its not as if it saves a lot of space compared with my laptop, and I'm certainly not typing anything serious on an in-screen keyboard. I'm sure it will find its niche, but I'm not sure how this destroys the kindle.

Posted by: justin84 | February 3, 2010 1:07 PM | Report abuse

"I thought a competitive marketplace was supposed to bring prices down?"

It will if demand wanes. If demand is high for certain titles, those titles will be increasing more expensive. Despite the economies of scale involved in increasingly huge printings, the price of each subsequent Harry Potter novel did not go down, despite the face there was increased supply and many more outlets selling the books.

Prices in a free market are still a function of supply and demand. If demand is high, prices will tend to be high. Specifically, if they can sell the same amount of product for $20 that they would sell for $10, it makes sense to charge $20.

On the other hand, if demand is low at $20 but noticeably higher at $10, prices will be driven down. Eventually.

I expect you will find that competition will drive the price down on older books and books that have been in print for more than a year, or books that didn't sell nearly as well as expected, and pretty soon. Popular titles that are highly anticipated, such as "Twilight: Ripping Bodice" will be, if anything, more expensive upon release.

And, lets not forget the most important thing about the free market. If I don't want to buy it, I don't have to. I'm not going to buy any $14.99 ebooks. As much as I'd love an iPad, and hope to have one, one day, I won't be buying any $14.99 ebooks.

Posted by: Kevin_Willis | February 3, 2010 1:09 PM | Report abuse

Upon further reflection, I also note that the incentive to buy a kindle to save on the cost of books is down, but since Amazon now will net $5 per book, shouldn't it knock the price of the kindle down to perhaps $199 or $179? Since they'll be making money on the blades, the razor can be a lot cheaper - and cheaper razors mean more blade sales, not to mention fewer high priced Apple razors being sold.

In anycase, there are utilitarian reasons to use a kindle, not only to save on books. Also a lot of books, particularly hardcover (the ones I often buy and so which is why I didn't notice the higher price of the eBook as a problem), start at $25-$40, and so going from $10 to $15 isn't that big of a deal.

Posted by: justin84 | February 3, 2010 1:14 PM | Report abuse

BTW, I doubt the iPad is a Kindle killer. The people it probably hurts the most are the folks coming out with competing ebook readers now. Without the Amazon name and whatnot, the Barnes & Noble ebook reader and the Sony ebook reader . . . I think all those are done for. You've got a great multipurpose device with a great store and a great single purpose (mostly) device with a great store . . . I think most of the others are going to be also-rans.

Posted by: Kevin_Willis | February 3, 2010 1:14 PM | Report abuse

APPLE = All Product Prices Ludicrously Excessive.

Apple’s model, from the beginning, has been to hold their margins very high. In the era when Apple was a computer company, the policy almost destroyed the company despite the superiority of their product. Now that Apple is an entertainment company (they make the lion’s share of their profits from sales of i-tunes,) they have continued that policy. Apple also tries to create a near-monopoly in their product lines so that they have the power to dictate prices. (Before someone points to the i-Phone prices compared with other smart phones, you need to realize that by giving a monopoly to ATT – much to the detriment of their customers – they receive a payment of around $100 a phone.)

Amazon, meanwhile, has used a very aggressive discount policy, trying to keep prices as low as possible to increase market share, and seeking discounts from suppliers to underwrite that.

That is what scares the publishers. Although they now reportedly receive payments for Kindle books that are equal to their dead trees books, they are worried that once Amazon attains the market position that they desire, they will turn on the publishers and demand discounts. In theory, e-books, which don’t have production costs, don’t have to be shipped, don’t involve problems with stocking and warehousing, and don’t generate returns to publishers of unsold inventory, should sell for less – about $5 less given the comparative costs.

In the end, Amazon may be playing “please don’t throw me in the old briar patch” with the publishers. Amazon may be ready to raise the price of e-books from their initial opening prices, perhaps into the range that the publishers want. If Amazon can retain their sales, that would be a big boost to profits while telling the custumers that the publishers made them do it.

Amazon enjoys a lot of advantages in the fight with Apple. There are about 3 million Kindles out there already. By all accounts, the reader function of the i-Pad is inferior. The device is bigger, way more expensive (to duplicate the features of Kindle as a reader you would have to buy the upgrade for around $900 and pay $39 a month for connectivity, otherwise you have to download books to your computer then transfer to the i-Pad.) I-pad displays are backlit, which causes eye fatigue if you read for a long time. Kindle is the likely continuing choice for the 15% of book buyers who buy over 50% of all books sold. I-Pad will be the choice for those who read comics and other high graphics and color content, and will have a market among people who own the i-Pad and want an occasional book, but who mainly use the machine for movies, games, and other non-reader uses.

In the end, publishers had better hope that the Kindle stays vital. If Amazon takes over the book market, the history with music suggests that they will be a very domineering partner and will damage the publishing business as they have the music business.

Posted by: PatS2 | February 3, 2010 1:43 PM | Report abuse

Being neither a Kindle nor an iPad user, I fully support this change. Hoping it will help keep my favorite local new and used bookstores in business at least a little longer.

"And, lets not forget the most important thing about the free market. If I don't want to buy it, I don't have to."

As someone whose preferences often don't fall within two standard deviations of the mean in a lot of places, I say your "free" market-based decision-making blows.

Posted by: slag | February 3, 2010 1:45 PM | Report abuse

The iPad has a huge advantage in the reader market in that it will be much more versatile. Lots of non-fiction books are just about useless without color photos, maps, and illustrations. You can picture getting an art history text on an iPad, not so much on a Kindle. Similarly, I might consider a road atlas on an iPad, but forget it on a Kindle. Even something like Time magazine is pretty dull on a Kindle. How about Playboy?

Posted by: AuthorEditor | February 3, 2010 2:26 PM | Report abuse

Prediction: Someday someone will develop one of these gizmos where you can add whatever program you want on it.

I can't remember what they call it -- 'open'-something or other.

Posted by: leoklein | February 3, 2010 2:27 PM | Report abuse

AuthorEditor --

You and I are saying the same thing: the i-Pad is for people who want or need to look at pictures. The Kindle is for people who want to read books.

i-Pad will dominate the art history market, but the market for history, politics, advice, and -- especially -- fiction will be better served by the smaller, cheaper, and more convenient Kindle with its e-ink application, roving downloads, much longer battery life, and free storage at Amazon.

As I said, the main market on i-Pad for normal books will be for people who have the i-Pad for other reasons and want a book every once in a while. The people who buy 20 or more books a year and who account for more than half of book sales will be better served by Kindle.

I suspect the biggest market for i-Pad books will be students, although the details of the textbook market and e-books have yet to be worked out, since most students sell their textbooks after they use them, recapturing a third to half the price, and many textbooks are sold used. A successful price structure will have to deal with those issues.

Posted by: PatS2 | February 3, 2010 2:43 PM | Report abuse

I consider $3.99 a fair price for an ebook.

Apple and Amazon can both go stuff it.

Posted by: pj_camp | February 3, 2010 3:07 PM | Report abuse

PatS2, the volume for some publishers is in the new fiction category, but the profits are all in the backlist and the nonfiction categories. I read that at Random House something like 52% of the volume is the best sellers, but only 10% of the profit. It isn't sexy, but things like textbooks, atlases, reference books, etc. are where the money is. Just imagine the difference if you can sell an art history ebook for maybe $50 or $60 because that's less than half price. Students will scarf those right up, and they might enjoy keeping them for the rest of their lives. Or how about travel guides that need to be updated all the time. Perfect for ebooks and better in color.

Posted by: AuthorEditor | February 3, 2010 3:09 PM | Report abuse

I don't know about any e-book being a lifetime investment. The only publication medium in wide use 25 years ago that's still readable today is paper. If you had bought a book on (a stack of) 5-inch floppies, today you'd be SOL.

Posted by: tl_houston | February 3, 2010 3:18 PM | Report abuse

AuthorEditor,

As someone who was recently in college, I doubt that the iPad is going to be great for textbooks out of the gate.

Price is a huge problem. Not for the eBooks, but for the iPad itself. Most college students have tight budget constraints, and even those from affluent backgrounds often times have parents who require them to buy their own books, even if things like tuition are picked up.

If the entry fee for the iPad is $500 + $39/month (much less the $900 Pat mentioned), its not going to attract much attention from college kids. Just the $39/month is probably about the same as a semester's worth of books, acounting for the ability to buy used and sell most/all of the books at the end of the semester.

Also, while the text books might retail at half price, you can't buy them used, nor can you sell them at the end of the semester. You probably can't return the eBook either if your professor ends up not using it and/or it simply isn't necessary for the course. On top of that, if you drop your hyper expensive iPad and the screen cracks, or if it gets stolen, you're out $500 - and your books are unavailable. I can see the FML postings now: "I dropped my iPad down the stairs - finals start in 15 hours and everyone who has copies of the books I need are using them to study - had to buy all of my books in hard copy at the library. FML!" The economics of the iPad for college student textbooks are terrible.

Outside of the economics, for the classes in which you really need the book, you might have to read 30-50 pages a night in some cases (and potentially more if you're studying for exams), and the iPad is backlit.

The only compelling case for the iPad is if it gets textbooks down to something like $10 or $15 a pop, or if students can link up their iPads and have four or five people share a book at the same time, sort of like Napster for eBooks. Each scenario is unlikely to occur.

I agree with tl_houston that you're risking a format change that will render eBooks obsolete, and most college students don't want to keep their rocks for jocks or pre-calculus text book any longer than they have to.

Posted by: justin84 | February 3, 2010 5:22 PM | Report abuse

AuthorEditor --

I agree that a lot of the money in the publishing industry comes from children's books, travel books, and textbooks. However, the Kindle does not have a dog in that fight, since they do not compete for those markets. I-Pad is well positioned to pick up that material, but poorly positioned to deal with fiction and other books that are pure print. As such, I see no evidence that Kindle will lose its position as the primary device for readers.

In fact, as I said earlier, Kindle may benefit from the higher profits while blaming the publishers for the higher prices. As someone said earlier, that change may allow Amazon to drop the price of the Kindle by a significant amount and shift the profit center from the device to the actual books. Since in theory (and of course no one but Amazon and the publishers know for sure) Amazon loses $2.50 on every e-book sale of new books, the switch to a $4.50 profit leads to a much better net -- $7 better. In fact, that profit is undoubtedly greater than the profit of about $2-$3 that Amazon makes on a new hardcover, after their deep discounts and shipping and handling.

This give Amazon a powerful incentive to try to increase the already strong position of the Kindle in the market. At say $119 per device, I think they would sell a lot more Kindles, and would blow the doors off the $500 basic i-Pad and the $900 advanced i-Pad with roaming net connection.

Posted by: PatS2 | February 3, 2010 6:58 PM | Report abuse

The Kindle is dead.

It is touted as a book reader but it really isn't. Instead it is a novel reader. Big difference.

Can you even read a Biology or Astronomy textbook on a Kindle? Hmm, no, each relies on color illustrations and photos in a way that makes reading them useless on a Kindle. Can you read a children's book on a Kindle? Well some of them. But most books for young children rely on color as an attention grabber and entertainment element. Reading the Wind in the Willows with black and white illustrations doesn't cut it. Is there anyone out there who wants to read a fashion magazine, or a celebrity magazine, or a music magazine where all the photos, illustrations and ads are black and white? Does anyone want to go out birding with a Field Guide that doesn't give you color? Anybody want to try to decipher a major metro transit map where the difference between the Orange Line and the Blue Line are rendered in 16 level gray code? No matter how easy it is on your eyes?

The Kindle is optimized for people who want to read the NYT top ten fiction list. It is essentially useless for people who read stuff for their pure utility. You can load a manual, a field book, a catalog, a museum guide on an iPad and have almost 100% of the utility factor of the physical paper volume, and since you could have dozens of such volumes on the device a hell of a lot more functionality. Except for that relatively small subset of people who discard most of the NY Times and retain only the Book Review section the Kindle will rapidly become a literally pale rendition of the iPad.

Want to sit a kid in your lap and read them the Cat in the Hat or Where the Wild Things Are on a Kindle? Don't think so. You think that same thing might work on an iPad? Of course after six hours the kid might get a mild case of eyestrain compared to six hours on a Kindle. On the other hand I don't know many kids with attention spans that long.

Early reports had the iPad coming in at $800-$1000. That gave Kindles room to breathe. But the $500 price point sucks all the oxygen out for Amazon, and particularly for the new $486 Kindle DX. For nine bucks more I get color? and GPS? and voice recognition? and games? As Vanna says nightly: Buh Bye!

Posted by: BruceWebb | February 4, 2010 9:31 AM | Report abuse

BruceWeb –

Do you really see birders carrying a $500 2 pound computer with them?

As far as GPS, the basic i-Pad will not have a useful GPS. Unless you want to find your location in Starbucks or other Wi-Fi hotspots, for that you will need the upgrade for $400 more and for a $39.99 a month fee to ATT. You won’t need it though, because you will still have your i-Phone or other smart phone, since the i-Pad will not have a phone function. The i-Phone will also do your subway map. So unless you need other i-Pad functions Kindle will still be the better reader.


For 95% of the books sold in the US, Kindle is not just as good as the i-Pad, it is better. Better screen for reading since it is not backlit, smaller and lighter to allow for easier reading in a variety of positions and for greater portability, much longer battery life, downloads of new books on the fly from almost anywhere, etc. Color has no role in reading most books -- not just novels but history, politics, biography and autobiography, self-help, business, pop-science, and so on, and has no role in reading for utility in most cases. The changes in the device required to get color (and very high resolution) actually hurt.

For children’s books that rely on illustrations (Cat in the Hat but not Harry Potter) and for some other special needs (some types of science books, art books, and so on), and for readers of picture content magazines i-Pad will be better. However that is not the market for Kindle now. That is a new market that Apple may well corner, unless people decide to download the stuff to their actual computer, which will weigh only a pound or so more and have the same battery life.

In the end, except for a few people who decide to buy the i-Pad for high graphics books, the main users of the reader feature on the i-Pad will be people who bought the i-Pad to play games and watch videos and movies and perhaps read People Magazine or SI, and who want to download a book once or twice a year.

With its superior function as a reader and with a price point – once the new cost schedule for e-books makes the books much more profitable than the sale of the reader – that will probably be 20% of the stripped version of the i-Pad and 10% of the version that matches the Kindle function as a means of downloading books, I am pretty sure that the version 1 of the i-Pad will not hurt the Kindle in its real market. The change in e-book prices may well help it, since Amazon will be able to portray itself as a helpless victim of Apple and the publishers conspiring to raise prices. In fact, I am very suspicious that the whole Macmillan dust-up is a PR move by Amazon to be able to say that they fought back against the villainous Steve Jobs and John Sargent but in the end were unable to protect their customers from those greedy SOB’s.

Posted by: PatS2 | February 4, 2010 7:13 PM | Report abuse

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