Over this past weekend Amazon pulled all of the books from book publisher Macmillan.  While there was no indication at first as to what the cause was, it quickly became evident that it was over pricing, and what that means to consumers in e-books in general is not a good thing.

Since the debut of the Kindle, Amazon has been doing everything it can to keep the price of e-books at $9.99 and under.  Amazon is a company that has built itself on volume sales, and the feeling was that the $9.99 price point was the magical barrier price to keep consumers coming back.  While it has not been publicly attested to by the company, some sources over the two years since the Kindle debuted have even indicated that the company has taken a loss on some books to keep customers coming back, and the wholesale price on some books ranged from $10 to $15.

kindle-2As the introduction of Apple’s iPad drew closer, Amazon made three very bold moves to fight off the newest challenger before the details were  even released to the public (not in chronological order, but order of importance):

  1. The first was to offer some long time customers what essentially boiled down to a free Kindle.  According to the reports from TechCrunch, select customers were offered deals where if they purchased a Kindle, and didn’t absolutely love it, they could receive a refund and keep the Kindle for free.  Sounds like a pretty good deal to us, and, hey, even if you didn’t love it, you might still buy some books, or give it to someone else who would.
  2. Amazon announced that it was launching an SDK (Software Development Kit) for developers to begin making apps and games for the Kindle.  While it is unclear what exactly could do on an e-ink display capable of only displaying 16 shades of gray, it was still an interesting step forward for the device.
  3. The final piece of the puzzle was the most important, and that the announcement that Amazon woul dbe offering a higher royalty rate of 70 percent to all authors that agreed to keep their books priced between $2.99 and $9.99 for the Kindle editions.

Once the iPad was introduced, and Steve Jobs said that publishers would be allowed to set their own prices in the iBook store, you had to kind of know the writing was on the wall that publishers were going to have a talk with Amazon, and it looks like Macmillan, considered one of “the big six” publishers, was the first to tell Amazon that things were going to have to change.

It appears that Macmillan wanted to have the right to raise the price of its books to as high as $14.99, and when Amazon balked, the two companies quickly parted ways.  Macmillan took out a full page ad in Publisher’s Lunch to explain the company side of the disagreement, and it boiled down to that the companies felt as if they were being cheated by the prices being kept so low.

By late Sunday night, Amazon agreed to give into Macmillan’s demands, and in a statement on the Kindle community message board, Amazon said it would be acquiescing to Macmillan’s request.  Amazon says that the decision was now in the hands of the consumers to decide if they were willing to pay that much for an e-book.

kindle2With one publisher having made Amazon blink, you can rest assured more will follow, raising the average price of e-books to a point where you might wonder why you don’t just go and buy the physical copy.

The whole point here is that Amazon, while making money, was also trying to teach the book industry a lesson, and it’s fairly obvious that the companies aren’t listening.  Books have gotten wildly out of control on pricing, and while there are many factors that have driven people away from reading, price is a definite consideration in these tough economic times.  Amazon was trying to teach the book publishers about volume sales, and it seems they wanted nothing to do with that idea.  This isn’t to mention that these Macmillan books will also no longer meet the requirements for the 70 percent royalty payment, so how many more copies of the Kindle editions will the publisher have to sell now to make the same amount of money?

The problem here is that book publishers are seeing an absolutely insane reduction in their capital expenditures to bring a book to market.  There is no raw materials cost, next to no labor, no storage, no returns, no shipping, few employee labor costs (meaning actual labor, not author or editorial) and so on, and they only have to produce one digital copy of a book that is then completely handled by the retailer.  The costs to the publisher have bee reduced to next to nothing on the manufacturing side, but yet they want to maintain their inflated prices in a market that constantly wails at how it is slowly dying out.

You have reduced costs, a market leader in a new technology that is trying to help carry you along, and you demand to stay with old pricing models that could possibly turn off the consumer.  Seems like no one is doing some very simple math in the publishing accounting offices.

Now that Amazon has given in, any other hold outs in the e-reader market are sure to start feeling pressure also, and in the end it will be the consumer as well as the publishers who lose out in all of this.  In short … you can thank Steve Jobs for caving to the publishers first.