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Will publishers kill Amazon's golden goose?

COMMENTARY Amazon (AMNZ), which usually doesn't get too specific about details of its sales, apparently felt the need to crow about the Kindle. The company claims to have sold 1 million a week for the past three weeks.

It's hot news, fueled in no small part by the Kindle Fire tablet. But while Amazon congratulates itself and tries to intimidate would-be competitors, publishers are potentially pouring cold water on the retailer's ardor. E-book prices are rising, according to a Wall Street Journal report. And that could come back to hurt Amazon, as well as Barnes & Noble (BKS), as the interplay of e-book and e-reader prices could start to make the devices far less desirable for consumers.

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A rising tide lifts all prices

In general, e-books have been selling at an increasingly fast pace. Market research firm Yankee Group expects e-book sales to be 9 times higher by 2013 versus what they were in 2009. The firm also forecasts the average e-book price to drop to $7 in 2013 from $9 over the same time span.

However, there's been a move in the opposite price direction on the part of the big publishers. Prices on mainstream e-books have approached those of printed books, dropping to only a little less that their paper counterparts, the Journal reports:

Laura Hillenbrand's nonfiction adventure tale "Unbroken" sells for $12.99 in digital form but $13.98 in hardcover on Amazon. Walter Isaacson's best-selling biography of Steve Jobs retails for $14.99 in e-book version, compared with the $17.49 hardcover available at Amazon and online at Wal-Mart Stores Inc.
To the publisher, that isn't unreasonable. The big costs in book publishing are writing, editing, production and marketing. Printing and warehousing typically represent between $1 to $2.50 per copy of book. From a publisher's view, e-books should be nearly the same price of paper copies.

Apple changed the dynamic

As it often does, Apple (AAPL) helped change the way the market works by getting publishers to adopt the so-called agency pricing model, where the publisher would set the price of e-books and the retailer would take a percentage. Apple thought that this would keep it from having to slug it out in the discount world of Amazon.

But in this case, the result was to let the big publishers push prices up to where they come close to those of paper copies (or, in a few cases, even exceed paper prices). As The Wall Street Journal points out, it's ironic when publishers make less money per copy than they did by charging wholesale prices that are actually discounts off list prices.

The reason publishers did this was to knowingly take a short-term hit in profitability in order to better control the long-term pricing trends of books. Publishers were scared that Amazon could gain control of pricing and then continue to drive e-book prices down, eventually paying less to publishers and more quickly undercutting paper book sales, which would be more profitable for the publishers.

Irresistible force meets unmovable object

But e-book and e-reader prices have a strong interaction. People may expect a digital file to cost less than a paper book, but they start to demand lower prices when they're potentially paying hundreds of dollars for a device. The higher the cost of the books, the less attractive the cost of the hardware seems.

The question is who gets hurt worse. According to the Journal, both Amazon and industry executives claim that growing e-book prices have slowed e-book market growth. That's bad news for Amazon. The company's move into not only e-readers but tablets with the Kindle Fire is still tied closely to Amazon's positioning as a media seller. So it's quite possible that Amazon -- and Barnes & Noble with its Nook tablet -- could see a drop in sales. But Apple's iPad wouldn't suffer, because consumers see it primarily as a tablet, not an e-reader.

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