Amazon Wants Cheaper E-Books. But Should It Get to Enforce Prices?

Amazon Wants Cheaper E-Books. But Should It Get to Enforce Prices?

FARHAD MANJOO

The New York Times 

In a short blog post meant to shed light on its contract dispute with the publisher Hachette, Amazon argued this week that its data proved that lower e-book prices were better for everyone in the market for books. That includes authors, publishers, customers and Amazon itself.
Amazon also said that in addition to looking for cheaper books, it was asking for just 30 percent of the price of an e-book — far less than many in the publishing industry had feared the company was seeking in its dispute with Hachette.

At first blush, the retailer’s numbers, and its transparency, are encouraging.
But when you compare the market for e-books with other thriving digital markets, a larger question emerges: Why should the price of books be contractually enforced at all?

Amazon says its data shows that e-books are “price elastic” goods — meaning that sales are sensitive to changes in price. Lower-priced e-books sell vastly more copies than high-priced books, so cheap books result in higher total revenue than if books were more expensive.
The company gives one example to support this argument. Based on its sales data, the firm says that an e-book that would sell 100,000 copies at $14.99 each would sell about 174,000 copies at the lower price of $9.99.

“Total revenue at $14.99 would be $1,499,000,” the company notes. “Total revenue at $9.99 is $1,738,000.” Not only would authors and publishers get 16 percent more money at the lower price, they’d get 74 percent more readers. And each customer, of course, would get to spend a third less.

This sounds reasonable. But as you think about Amazon’s example, a couple of red flags pop up. Amazon declined to discuss its blog post on the record, but its post notes that its data is based on aggregate sales over a wide number of books in its Kindle store. This suggests that price elasticity for specific titles varies widely according to author, genre, length, difficulty and perhaps several other factors.

This makes intuitive sense: Wouldn’t people pay more for a 750-page book by Stephen King than, say, a 100-pager by an unknown debut novelist, Steven Qing? So while it may be true that $9.99 is better than $14.99 in general, certain books might make the most money at $10.99, $11.99, $12.99 — or even $2.99.
Then there’s the question of the market for print books. Some of the people who are willing to buy an e-book at $9.99 but not at $14.99 might be coming over from the market for print books. So what if the increased revenue that authors and publishers get from low-priced e-books is outweighed by lowered revenue through cannibalized print sales? Amazon, which sells print books, would know whether this is the case, but its post says nothing about print titles.

That gets to the larger problem with Amazon’s post. If the optimal market price for an e-book is $9.99, why does Amazon need to push for the lower price as part of a contract negotiation? Why can’t it let publishers set prices for themselves, preferably with the help of Amazon’s sales data, in the hope that they will eventually hit on the economically optimal price?

You might say that publishers can’t be trusted to act in their own interest. After all, a federal court has found that publishers illegally colluded with Apple to collectively raise the price of books; that collusion resulted in higher prices and lower sales of e-books. So perhaps Amazon feels that it needs to force publishers to settle on $9.99 in most cases because otherwise they’d shoot themselves in the foot.

That could be so. But it’s worth noting that contractually enforcing prices is something of an antiquated practice in digital marketplaces. Sure, when Apple set up the iTunes store, it created a set price for songs. But that was more than a decade ago; since then, digital marketplaces have matured, and we’ve seen a dizzying array of new business models. There are subscription-based music and media services, games funded by in-app purchases, social networks funded by ads, and hardware companies funded by e-commerce.

Some of these work better than others. But it was only through experimentation that app makers figured out the best way to pay for their code. If Apple hadn’t allowed for this experimentation in its app store — if Steve Jobs had decided that all apps would cost $2.99, period — the app market wouldn’t be the thriving multibillion-dollar business it is now.

The same logic applies to books. I take Amazon at its word when it says it is interested in creating a thriving market for e-books. But the market for e-books is pretty new, and it stands to reason that the best business model for publishers, authors, readers, and booksellers has yet to be found. In the end, we may see many different ways to pay for books.

Creating a single, typical price for e-books would stifle that potentially glorious future; $9.99 might work fine some of the time, but no price is  perfect for everyone, always.

Correction: August 1, 2014, Friday

This article has been revised to reflect the following correction: An earlier version of this post misspelled the first name of an author. He is Stephen King, not Steven King.