Recently, blogger and journalist extraordinaire Dan Gillmor tweeted about how some publisher was selling an e-book at a higher price than the hardcover. Dan’s comment was that the publisher (Penquin in this case) just “didn’t get it.”
I think Dan’s wrong on this one.
People buy e-books (and e-book readers–more on that in a minute) for a lot of reasons. But most of them are related to convenience. The ability to download books, a large and growing selection, the ability to carry an entire library with you, low weight, getting a new book the day it debuts without fears it will be sold out. And yes, they’re almost always cheaper.
Consumers have always been willing to pay for convenience.
If people really like e-books, why wouldn’t they pay more for the convenience? Now that they’ve shelled out good money for their Kindle (or Nook, or whatever) they’re sort of stuck, aren’t they? Are they really going to go back to buying hardcovers–and trashing their e-readers–just because the book price went up?
Let me get a show of hands. How many of you walked back into the bank to use a real teller once they started charging a few bucks to withdraw money from an ATM? Not many, I bet. Remember when there were hardly any commercials on cable TV, because you paid a subscriber fee for it? Did you cut the cord because ads started showing up? Nope.
Publishers aren’t stupid. They’re going to charge as much as the market will bear for an e-book. But they have to be deliberate in how they go about it. For this to work they need two things:
- Enough separate e-book outlets so they maintain a measure of pricing control (no iBook store to monopolize distribution), and
- Enough e-book readers on the market so they have a critical mass of customers.
It’ll happen gradually, but e-book prices will drift up. They may never exceed hardcover prices–perhaps they’ll end up somewhere between that point and retail paperbacks. Whatever the level, it’s clear publishers will be raising prices on more titles in the future–particularly popular authors and hot books.
Which brings me to my second point. If publishers and sellers require lots of e-book devices in the market to maximize profits from e-book sales, what do you think will happen to the price of e-readers?
Sure, e-readers might not actually become “free”. Perhaps they’ll be subsidized like cell phones by the operators whose networks are used to download the e-books. Sign up for AT&T service (NYSE:T) for 2 years, get a starter cell phone, and we’ll even throw in a Kindle. Or agree to buy 2 e-books a month from Barnes and Noble (NYSE:BKS) over the next year, and your Nook costs you nothing.
- The number of available e-readers has grown significantly
- You can already read e-books on other (multi-purpose) platforms like PCs or tablets
- Apple (NASDAQ: APPL) has sold more than 8 million iPads already, while Kindle sales are at best less than half that
- Entry-level e-readers have dropped dramatically in price since they premiered (though new ones with more features still command a premium).
This all maximizes publisher profit . It also increases revenue for distributors like Amazon (NASDAQ: AMZN) and Barnes & Noble who provide the devices. They will more than make up the cost of e-readers with increased profit on e-book sales.
The real beauty of this strategy is that it effectively takes the cannibalization of physical book sales completely off the table.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.