Meissner Research Group

The iPad, Apple’s newest technological wonder, will be released on April 3^rd, just a few short weeks from now, but one thing probably missing from its advertised digital bookstore, iBookstore, will be the books from the world’s sales leader in publishing, Random House.

In the Financial Times article ‘Random House fears iPad price war’, Random House chief executive Markus Dohle said that Random House was still reviewing their options, as they fear that Apple’s pricing policy is of an interest to their stakeholders. The publisher was still in discussions with their agents and authors over the decision.

Random House is a division of Bertelsmann, whose profits declined over the past year, thanks in large part to the recession. And while the company believes they will make gains this year, they are not sure that allowing Apple to control the pricing policy of their e-books is the way to go about it.

Apple’s current e-book policy is that publishers will set the price for their own books, with Apple receiving 30 cents off every dollar. While the other five major publishers (which account for nearly all of Random House’s competition) have already signed on with Apple and their iBookstore, this new pricing scheme is very different from standard publishing policies.

In standard publishing pricing, the publishers sell books to the bookstores at a wholesale rate. The bookstores then make a profit by marking up the books from the wholesale rate. Bookstores can even return unsold books. Even Amazon, one of the world’s top bestsellers and one of the darlings of e-commerce, sells its book this way. While the publishers and Apple both agree that e-books are here to stay, neither is quite sure how to actually price them successfully to make both companies and their customers happy.

In the end, Random House must realize that a price war of any type is not beneficial to their company. If Random House takes Apple’s offer of controlling their own prices, they must quickly realize that trying to price their bestsellers at a price lower than their competitors will only result in spend-thrifty customers and low revenues. And if Random House decides to take Apple’s deal and then prices their books far too low, customers will always expect that price. And they will now be simply a few touches on the touchscreen away from picking up a book from Harper-Collins or Macmillan instead.

Customers have a habit of demanding lower prices, especially when they believe a product’s price represents a huge profit for the company. The case in point here is e-books, just one of many digital products facing the e-pricing dilemma.

In recent weeks, thanks to the soon-to-be-released Apple iPad, five of the six major publishers banded together to demand a change in price. Up until now, Amazon, the leading e-book seller, has set most bestsellers at a $9.99 price point, but by making a deal with Apple to price books from $12.99 to $14.99 and threatening to remove their products from Amazon’s online store and it’s e-reader Kindle, the publishers were able to push up the price.

To illustrate why publishers keep pushing for the higher price, the recent New York Times article ‘Math of Publishing Meets the E-Book’ by Motoko Rich broke down standard hardcover book pricing and compared it to the new iPad digital pricing, also suggesting, according to Rich, that “customers have exaggerated the savings and have developed unrealistic expectations of how low the prices of e-books can go.”

A hardcover books costs about $26. After all the production, editing, marketing, and author’s royalties are paid (see graph), the publisher actually only sees about $4.05 in return, but that’s before any of the overhead bills are paid. Compare this to $12.99 digital price. In the new set-up with Apple, the publishers make between $4.56 to $5.54 in profit (see graph).

But this profit does not actually represent how much profit a publisher makes off any book. Like movie producers, publishers expect a loss on most of their products. Most books are published and disappear from the bookstore shelves long before the publisher recoups the author’s original advance and the original run’s printing costs. In the end, publishers truly only make money off major blockbuster books, further creeping into the publisher’s profitability.

On the other side of the pricing debate is the booksellers themselves. America only has two major booksellers left: Barnes N Noble and Borders, and many of the smaller independent have started shutting down due to Amazon. If the digital revolution takes hold with book-buying customers at too low a price point, it could also mean the end for traditional printed books, as there won’t be any bookstores left o sell them. Borders has already closed the majority of their stores in the U.K.

Some are advocating that the publishing world should step away from digital publishing and should discourage their customers from buying e-books by setting a high price for them. A similar idea has been put forth to save newspapers, which seems to be failing.

Many, however, realize that trying to hold back the digital revolution simply won’t work. Anne Rice, one of the most popular paranormal and horror writers in the world, said, “The only thing I know is a mistake is people trying to hold back e-books or Kindle and trying to head off the revolution by building a dam. It’s not going to work.” Publishers, a notoriously conservative business as a whole, are going to have to find a way to start looking towards the future, if they want to make their products viable and profitable once more.

The story of the digital price wars is all about change. As each new technology develops and transitions into part of the mainstream culture, the way the average customer buys their goods is dramatically altered. And the price that customers pay must change right along with it.

According to the recent article ‘Is the price right for e-books?’ by BBC blogger Rory Cellan-Jones, the war over the price for e-book content is poised to become a major issue for the publishing world over the next year in the United Kingdom.

With Amazon, Sony, and Barnes N Noble all developing their own portable reading devices, UK patrons still complain that high prices and lousy access to the books they want have stopped them from purchasing e-books. This has allowed smaller companies like Kobobooks to develop e-readers that allow for easy reading across platforms (portable device, TV, computer, etc.) and easier, faster downloads.

However, it appears most customers care more about the price of the book then how they get it or where they can read it. With Amazon in a power struggle with publishers both in the UK and in America over who determines the price of books, the standard pricing for any book is far from being decided. In fact, just last month Macmillan, one of “Big Six” English language publishers, blocked Amazon from selling any of their products, in a move designated to keep digital book prices high. Macmillan and Amazon may have compromised, but this was surely just one skirmish in a long war.

Perhaps Amazon should focus on how Apple transformed the music world with iTunes. By designating a simple pricing scheme (99 cents per song), Apple was able to give customers the access, speed, and (most importantly) price they wanted. They also won many court cases that gave them the right to determine their own prices. If Amazon and the other e-readers can follow suit, a bottom line price could help drive e-books and e-readers into the hands of every UK citizen.