As mentioned in a Feb 2010 blog post, Amazon wants to sell bestselling ebooks at a discount ($9.99 in the U.S.) to encourage more people to browse its store and to buy books in the Kindle ebook format. Under its current wholesale pricing model, Amazon pays book publishers a fixed price per copy of ebook sold (usually half the list price of a hardcover version of the book) and then is allowed to price the ebooks as it sees fit.

If the publisher is getting a fixed license fee per book, why should it care what the retailer charges its customers for the book? In fact, shouldn’t it want the retailer to charge a low price in order to maximize the total sales and thus the publisher’s profits? The answer is maybe.

The wholesale pricing model works fine for publishers when selling rights to the softcover edition of books, since softcover books appear several months after the hardcover edition and so do not compete directly. Further, the difference in quality between hardcover and softcover makes it obvious to the customer that one is less valuable than the other.

However, this isn’t true with ebooks. They often appear at the same time as the hardcover edition, sometimes even before the hardcover edition. And many people now prefer to read ebooks over paper books. Thus, many publishers dislike discounted ebooks since they think that the low price debases the value of their hardcover books. This can reduce demand for hardcover books, which is where publishers make most of their money. In this case, the publisher would like to control the price that the retailer charges for an ebook, a practice called retail price maintenance.

To address publisher’s concerns, Apple has set ebook licensing agreements with several publishers using an agency pricing model in which the publisher sets the price and keeps 70% of the revenue, with Apple taking 30%. Most publishers have eagerly accepted Apple’s offer. And many are eager to get the same arrangement from Amazon.

I was surprised that publishers like this. By setting prices themselves, publishers are now competing with their own customers, the book wholesalers and retailers. This can put them in a very tough situation because under the Robinson-Patman Act, providing discounts on discriminatory terms can lead to civil penalties. You can bet the American Booksellers Association is watching this very carefully and will pounce if it perceives any antitrust violations.

Today, the Wall St. J. reports that Amazon and Pearson’s Penguin Group have still not set a licensing agreement for ebooks. To put pressure on Penguin to accept its terms, Amazon has decided to sell the hardcover edition of Penguin’s best sellers for $9.99. An example is shown below.

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A Penguin bestseller. Image from Amazon

In the image above, notice that the link to the Kindle Edition is still available. However, if you click on it, you get the error message shown below.

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A failure to communicate. Image from Amazon

Things may get more interesting if Google launches its Google Editions cloud-based bookstore later this year. However, as far as I know, Google has no reading device under development. Also, it has poor relationships with publishers because of the controversy resulting from its Google Books copyright lawsuit and eventual settlement agreement.

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