Why publishers and Amazon are fighting about eBook pricing and why the typical supply and demand forces are skewed in this growing market. Who wins this fight will determine the course of the market for years to come.
Right now Amazon and Macmillan are having a very public fight about how much to price their eBooks with Amazon wanting a 9.99 cap on the price and Macmillan (and most other big publishers) wanting complete freedom to charge closer to 14.99 or higher for their eBooks. Why does Amazon want a price cap and why is it so important for the main publishers (the big six) to be able to charge much more than that? Because the 9.99 price point could change the course for the entire eBook market.
How did we get here? It is mostly Amazon’s fault. Much like Apple and the iTunes market, the eBook market existed well before Amazon came on the scene but did not take off before Amazon started offering an eBook reader, the Kindle, and the accompanying Kindle store. Amazon did this through clever advertising, and innovative way to read books, and an average price for new eBooks of 9.99. One of the main selling points for their Kindle reader was that the customer could eventually pay for the expensive device (399.99 when it first came out) by saving money on new books. Instead of paying the typical 30 dollars for a new hardback book they could save twenty dollars by spending 9.99 on an eBook instead. This tempting price is one of the main reasons the eBook market took off and has grown from a 8 million dollar market in 2007 to a 58 million dollar market in 2009, with Amazon controlling roughly 80 percent of that market. Source.
At first Macmillan and the big six publishers were happy with Amazon, in fact they agreed to the 9.99 price point at first, and were happy with the extra revenues that came from eBooks. Just recently there has been a fundamental shift in how the big six publishers see the eBook market. At first they saw it as a extra market and were happy to have Amazon do all the work to control the market and the publishers could get maximum returns from minimal investments.
Now that the eBook market has grown it has changed how they see the profits from the Amazon eBook store. Now that the market is large enough they see the profits as eating into the sales of the print books. If several customers buy the an eBook at 9.99 they won’t buy the same book as a hardback book at 30 dollars. Regardless of the actual production costs, the publisher earns more profit on the hardback book and they are starting to feel the pinch of lower profits. The big six publishers fear that eBooks will start to cut into their sales of paper books, and perhaps more importantly, it will lessen their ability to sell print books at 30 dollars because customers will be unwilling to pay more than 9.99 for a book. So they have tried raising their prices and delaying eBook releases to curb the affect the eBook is having on their print market. Since the print market is bringing in more revenue, their incentive is to let the eBook market shrink, so their current strategies are geared towards print as the more important market.
Amazon sees things differently though because they are at a different level in the book market. Since Amazon wants a bigger piece of the pie it is trying to push eBook prices down so they can drive up demand for the cheap eBooks. This is a fairly simple business model and it has worked with other markets, such as iTunes and music sales. Amazon is so dedicated to that magic 9.99 price they have sold some eBooks at a loss for over a year to build the market. The publishers still get their asking price but the customers don’t pay more than the magic number.
The interesting thing about both sides is that they are not playing by the regular rules of capitalism. Both companies are not trying to charge exactly what the eBook market will pay, they have both tried to artificially nudge the market to the price they want. Instead of a supply and demand equilibrium, both sides are now actively working to manipulate supply (through price since in this case the product is digital) to get demand where they want it. Amazon has been the more successful of the two so far, but the big six publishers are fighting back now. Perhaps because Apple has opened up the eBook market with their iBook store, the publishers have stopped toeing the Amazon line. They have rejected the 9.99 cap and have started listing some books at 15 and 20 dollars.
For a few days Amazon tried playing hardball and stopped listing any book from the offending publisher Macmillan. Although they did eventually cave and relist their books, that move had another (surely intended) effect of drawing attention to the price war. There has been a large backlash against the higher priced books and their publishers. Some authors have even gotten hate mail over the policies of their publishers. Many customers now refuse to pay more than 9.99 for an eBook and have started boycotting them. There is also a new tag on Amazon called “9.99 boycott” and has shown up on all overpriced books.
In other markets this fight would eventually lead to a stable supply and demand equilibrium with a good price for all. But with Amazon willing to invest in loss leading eBooks and the big six willing to price the eBook market into oblivion, it is anyone’s guess where the market will go next.