Amazon's E-Book Price Reversal: A Mixed Blessing

Buyers of electronic books on Amazon's Kindle store rave about the convenient wireless downloads, the device's easy-to-read screen, and the $9.99 average price for new bestsellers. Before long they may have to settle for two out of three.

Amazon (AMZN) said on Jan. 31 that it will let Macmillan, one of the store's largest publishers, set its own prices for Kindle books and keep 70% of the sales. The green light is expected to result in a price increase of as much as 50% for Macmillan titles and may bring higher prices for Macmillan's competitors, the Authors Guild told Bloomberg News.

The price moves would give book publishers greater control over digital book prices and may help Amazon stem the losses it now incurs on many titles. At the same time, higher prices for digital books would add to the burden borne by e-book readers and it may curb demand from people willing to buy Kindles in the expectation that they can get digital titles for $10. "From the consumer's point of view it's obviously not the best decision, but Amazon wants to maintain their position in the e-book market and they've decided to play ball with the publishers," says Colin Sebastian, analyst at Lazard Capital Markets.

Before making its concession, Amazon initially reacted to Macmillan's demand for pricing controls by removing all of the publisher's print and electronic books from its site. After two days and a storm of criticism in blogs, the Seattle giant of e-commerce relented, saying in a letter posted on its site that customers should "decide for themselves whether they believe it's reasonable to pay $14.99 for a bestselling e-book," referring to the price Macmillan intends to set in the store.

Apple's iPad: a "compelling" option

Representatives from Macmillan did not return multiple requests for comment. Amazon spokesman Drew Herdener declined to comment on whether the company expected other publishers to request changes similar to Macmillan's.

Amazon has lost some flexibility over pricing, thanks to imminent competition from Apple (AAPL), which in January introduced a tablet-style computer that includes e-book reading. Amazon used its $9.99 price "as part of its competitive strategy to win in the e-books market," says Collins Stewart analyst Sandeep Aggarwal. With the imminent sale of Apple's iPad, "all of a sudden, publishers have very compelling choices."

Macmillan said in a Jan.30 public letter that it will sell new titles for "between $14.99 and $12.99." The new prices have yet to appear on the Kindle store, but customers are already voicing opinions as to how the increase will affect their book-buying habits. Many say there's a big difference between $10 and $15.

Peter Czech, an Internet entrepreneur in Rutherford, N. J., has purchased more than 10 e-books from Amazon since receiving a Kindle as a Christmas present in December. Some of these titles were picked up as "impulse buys" while browsing the bestseller list, Czech says. Others were duplicate purchases of books he already had in hard copy. Increasing the price to $15 would "make me think twice before making an impulse purchase," he says.

opting for cheaper or free titles?

Most consumers expect digital books to be more affordable than print books because they incur no costs for printing or distribution. According to a survey recently conducted by Forrester Research (FORR), respondents said they would be willing to pay up to $17.81 for a new electronic book if the hardcover edition cost $25. They can pay as little as $12 for a hardback at Costco (COST) or Walmart (WMT), says Forrester analyst James McQuivey, who asks: "How do you justify telling people they should pay more for a digital book?"

Value is paramount for Olga Burke, who works in human resources at insurance giant AXA (AXA) in New York. As a new Kindle owner, Burke says she would be less inclined to buy full-price titles on the device if e-books were $15. "I would be more likely to look for deals," Burke says. Instead of the latest releases, she'd opt for cheaper or even free titles, such as Not Your Mother's Slow Cooker Cookbook—a title she downloaded to her Kindle at no charge.

Eventually, giving publishers control over pricing might have the opposite effect—falling prices. If Macmillan sets its prices at $15, competitors would have something to gain by setting theirs at one or two dollars less, says Forrester's McQuivey. "There will always be some publisher that undercuts the market."

For now, though, higher prices may have the unintended consequence of putting off potential Kindle buyers. Darrin Wilson, a Toronto-based Web designer, was close to buying Amazon's e-reader until he heard the news about Macmillan's pricing plans, along with speculation that other publishers will follow suit. "Now that these things are going to go up and up in price, where is it going to stop?" Wilson asks. "I don't think it's worth it any more."

Before it's here, it's on the Bloomberg Terminal.