DECEMBER 15, 2011
Cheap new e-readers are expected to be one of the hottest gifts this holiday season. But new owners of Kindles and Nooks may be in for sticker shock on Christmas morning: The price gap between the print and e-versions of some top sellers has now narrowed to within a few dollars—and in some cases, e-books are more expensive than their printed equivalents.
When Amazon.com Inc. introduced its first Kindle e-reader back in November 2007, the $9.99 digital best seller was a key selling point. Today, the price of a Kindle has plummeted to under $100—from $399 back then. But e-book prices for some popular titles have soared.
Take Ken Follett’s massive novel “Fall of Giants,” for example, which costs $18.99 as an e-book. On Wednesday it was selling for $16.50 as a paperback on Amazon.
The digital price increases are the result of a decision by the six biggest publishers to set their own consumer e-book prices, a move that effectively bars retailers from discounting their e-books without permission. No such agreement exists for printed books—where retailers are free to set their own prices. So while a best-selling e-book price is often less than half of the hardcover price, heavy discounting of the print version closes the gap.
Industry executives say this new state of affairs may already be hurting e-book sales, which have skyrocketed over the past three years and are today 15% to 20% or more of major publishers’ revenue.
“Some people who see $12.99 and $14.99 for e-books may find those prices a little expensive,” says Scott Waxman, a literary agent and digital-books publisher.
For best-selling authors like James Patterson, “people may feel that if they aren’t getting a bargain, at least they are getting convenience and portability,” Mr. Waxman says. But he’s less convinced people will shell out for lesser-known writers.
Mark Weaver, a New Yorker who owns an iPad 2 and used to have a Kindle, says he is “definitely buying fewer” e-books because of higher prices. “It’s hard to justify the purchase of e-books that are priced at $10 to $15 when you can buy the real book on Amazon used for $2 or $3,” he says.
Experts say higher prices could cause some digital consumers to turn to piracy sites. “We don’t have data that directly correlates higher e-book prices to higher rates of piracy, but the piracy rate per title has grown exponentially over the last 12 months,” says Matt Robinson, president of Attributor Inc., a leading antipiracy provider to the book industry.
To be sure, most e-books are still cheap. Yankee Group, a Boston-based research firm, says that the average price of a consumer digital book has fallen to $8.19 this year from $9.23 in 2009. Lagardère SCA’s Hachette Book Group says that 83% of its digital titles are priced at $9.99 or below.
But for many of the country’s most popular titles, consumers are paying more.
Laura Hillenbrand’s nonfiction adventure tale “Unbroken” sells for $12.99 in digital form but $13.98 in hardcover on Amazon. Walter Isaacson’s best-selling biography of Steve Jobs retails for $14.99 in e-book version, compared with the $17.49 hardcover available at Amazon and online at Wal-Mart Stores Inc.
It was Mr. Jobs himself who wanted to level the playing field for e-book pricing. Early last year, as Mr. Jobs, then CEO of Apple Inc., planned for the launch of the iPad, the company wanted to start an e-book store so that iPad owners didn’t have to rely on Amazon’s Kindle store to buy e-books.
But Apple didn’t want to have to compete with Amazon’s discounted prices. Under Mr. Jobs’s direction, Apple persuaded five of the biggest publishers to abandon the wholesale model, by which retailers were free to discount the recommended retail price. Under the new pricing arrangement, publishers set the price of e-books.
In March, Random House Inc., a unit of Bertelsmann AG and the country’s largest consumer book publisher, joined its five large rivals in adopting the no-discounting digital pricing model.
The Justice Department confirmed last week that it was investigating whether there was improper collusion between the publishers and Apple to prevent discounting. Publishers last week either disagreed with the allegations, said they were cooperating with regulators or declined to comment. Random House said it isn’t part of the probe and otherwise declined to comment. Apple declined to comment at the time.
Ironically, though, publishers make less money with the arrangement. The six publishers which use this model today include Random House; Hachette; Macmillan, a unit of Germany’s Verlagsgruppe Georg von Holtzbrinck GmbH; Simon & Schuster Inc., a unit of CBS Corp.; Pearson PLC’s Penguin Group; and HarperCollins Publishers, a unit of News Corp., which also owns The Wall Street Journal.
Under the old book arrangement, major publishers charged the same wholesale price for e-books as they received for hardcovers. For a new novel priced at $25, for example, they received $12.50 for the e-book and $12.50 for the hardcover. When Amazon.com discounted the e-book at $9.99, Amazon took the loss.
But under the new pricing model, a $25 hardcover is often priced at $12.99 for the e-book. And because publishers receive 70% of the e-book retail price—while retailers retain 30%—that means publishers receive only $9.09. Publishers were willing to accept the lower profits because they felt the new arrangement preserved the value of books and encouraged other retailers to enter the e-book market.
Indeed, the new arrangement means guaranteed profits on best-selling titles for retailers like Barnes & Noble Inc., which today claims about 27% of the digital books market, as well as Amazon.
Even so, Amazon warns the arrangement has slowed the growth of the e-book market. Russell Grandinetti, Amazon’s vice president of Kindle Content, says the growth rate in dollar terms for publishers using the traditional wholesale model that allows discounting is significantly higher than that of publishers that don’t allow discounting.
Mike Shatzkin, chief executive of Idea Logical Co., a New York-based publishing consultancy, says that he expects e-books will account for 30% to 35% of all revenue for the country’s largest publishers by the end of 2012. That growth may also reflect wider penetration of e-readers in the population. James McQuivey, an analyst at Forrester Research, estimates that at least 20 million U.S. households will own a dedicated e-reader, like a Kindle or Nook, by year-end—compared with just over 10 million last year. Another 17 million tablets will be sold here this year, up from 7.6 million last year, the Yankee Group says.
Publishers believe that e-books are priced correctly and say consumers have shown that they are willing to pay $12.99 for a digital best seller.
“What that tells me is that there has been a change in the understanding of the value of a digital book, and that a digital book has advantages over a physical book in some cases,” says Maja Thomas, a senior vice president of Hachette Digital. “It’s instantaneous, it’s portable, it’s minimal in terms of storage, and it can be retrieved from all kinds of places and devices. It’s also searchable, and it’s easy to take notes and retrieve them.”
Other publishing executives acknowledge price is an issue. John Makinson, chief executive of Penguin Group, says Penguin has seen some price resistance at the higher end, such as the $18.99 that it charges for the digital edition of Mr. Follett’s “Fall of Giants.”
“Some of the issue is that digital customers can’t see how large the book actually is,” he says.
Mr. Makinson agrees that lower prices result in higher unit sales. But he says the revenue generated by those increased sales doesn’t make up for the lost revenue from sales at higher prices. Lower pricing also negatively affects income for authors dependent on royalty payments, he says.
Lorraine Shanley, a publishing industry consultant, says higher digital-book prices may lead some consumers to try self-published works. “If you really want a book, you’ll pay the $12.99 or $14.99,” she says. “But price is definitely an issue for consumers. At some point, they may say they’re willing to try a generic $2.99 mystery that has five stars from readers.”
Write to Jeffrey A. Trachtenberg at firstname.lastname@example.org