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Pricing, Macmillan, and Disintermediation

The book industry is doing some things right and some things wrong.

On the positive side, it appears that most of the book publishers have decided to embrace disintermediation by internet enabled digital channels. They’re correct that, for now, piracy of books isn’t as easy as it has been for movies and music. By making compelling digital editions available they are staving off some piratical demand.

However, the Amazon/Macmillan price spat speaks to a darker side of the problem. Some commenters imply that everyone will lose money should the price of an ebook be less than the traditional hardcover. The reality of the matter is that consumers do expect to make direct monetary gains from the cost savings of digital distribution. There is certainly an argument that the ebook is a superior user experience (just have a hankering for a few new books and take a multi-leg round trip with only carry-ons to see what I mean) but there is no real economic argument on the other side that publishers have the same cost structure that they had in the physical book.

Unsurprisingly, price elasticity is in full effect and Amazon has shown publishers that the lower prices for which they are advocating sell more books. The usual economic rule here is that the unit increment (with no additional print/storage/ship/over inventory costs) increase will more than offset the revenue per unit decrease. Unlike the music industry, there is no historical bundling issue where the music business was selling you 1 song for the price of 12.

To assume that Amazon “taught” users that ebooks should be cheaper simply ignores the intelligence of the average book reader. Books are now going to be a full participant in the Napsterization of commerce and I predict book publishers and retailers will start to have to think about how to create longer customer lifetimes and higher customer lifetime value. I look forward to ebook subscription services.

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