A Cheaper Apple iPad Could Short-Circuit Publishers' Victory Over Amazon

Last Updated Feb 11, 2010 7:34 PM EST

Publishers may have scored a victory over Amazon (AMZN) in the battle over e-book pricing, but it may ultimately prove fruitless when Apple's (APPL) iPad enters the playing field in March, as it could deal a surprise left hook to the cost and perceived value of digital books.

It starts with the wind up: iSuppli, a market research firm that "helps clients improve performance in the electronics value chain" just issued a report stating that Apple's cost to manufacture the iPad is less than half the retail price (for the basic model, that's $499). This gives Apple the flexibility to lower the price to boost sales without dinging its bottom line too much. Wall Street analysts are predicting that even with that price tag, iPad could sell more than a million units in the first year.

What does this mean for e-books? Two things.

The first is that it suggests consumers will be more enchanted with the device than the content. Even at half the price of the iPad, Barnes & Noble's (BKS) Nook is still not cheap, but demand has been high enough for B&N to have trouble stocking the device it in all its stores. Yet while Amazon CEO Jeff Bezos crows about the "millions" of Kindles sold in the past two years, a study by Verso Advertising indicates that only 25 percent of readers plan to purchase an e-book in the next 12 months.

The second is that if publishers really want to control the cost of e-books, they are going to have to do a better job of showing consumers why a digital download is worth more than $9.99. There's already a backlash to increasing e-book prices, with consumers accusing both authors and their publishers of greed.

But Robert Miller, publisher of HarperStudio (a division of HarperCollins) broke down the costs to produce a book for me, and the profit margin is incremental.

Of the $12.50 we get now for a $25.00 book, we spend about $2.00 to produce each copy, about $1.00 to market each copy, and another $1.00 or so on freight and warehousing, etc., leaving us roughly $8.50 out of which we must pay the author (who would get $4.25 if this were a profit-share, or $3.75 if this were a 15% royalty) and cover our significant overheads.
Publishing consultant Mike Shatzkin of the Idealogical Company told me that those overhead costs are not insignificant if you factor in editors' salaries and author advances which can run in the tens of thousands.

The good news for publishers is that there is still a window of opportunity. The same Verso study found that around 37 percent of readers were still unsure about maximum price they'd pay for e-books. Publishers just need to be quick about educating them before that window slams shut.