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Summary:

Apple didn’t want to compete with Amazon on ebook prices. But it is already showing that it is more than willing to do so. And if customers are drawn to Apple’s new low prices on ebooks, it’s possible to envision the company’s ebook market share rising.

Using iBookstore On iPad

Apple would prefer agency pricing on ebooks — that, we know. In fact, Apple is likely to appeal the DOJ’s ebook pricing settlement with HarperCollins, Hachette and Simon & Schuster, which was approved last week. Turns out, though, that doesn’t mean Apple won’t play the price-drop game on their ebooks in the meantime.

We saw yesterday that HarperCollins has already entered into new contracts with ebook retailers like Amazon, Barnes & Noble and Google. Now Apple has a new deal with HarperCollins too. This morning I compared the prices of 12 HarperCollins titles across ebook retailers. Like Amazon, Apple is selling new bestselling ebooks for $9.99. (I’ve asked Apple for a comment on its pricing strategy for ebooks and will update this post if I hear back.)

Amazon is already dropping its ebook prices to match Apple’s, in the cases where Apple had priced a book lower than Amazon did. For instance, James Rollin’s Bloodlines and J.A. Jance’s Judgment Call were each $10.94 in the Kindle Store this morning and $9.99 in iTunes. Just a few hours later, both books are down to $9.99 at Amazon as well.

Sure, we can’t draw major conclusions about Apple’s new ebook pricing strategy based on what it’s done with one publisher’s books. But in the case of HarperCollins, we’re already seeing that even if Apple would prefer agency pricing, price bands and MFNs for books, it’s willing to compete on price in the absence of those things. And it has a lot more money to do so than other ebook retailers like Barnes & Noble and Kobo.

Under agency pricing, Apple’s ebook market share hovered around 10 percent. But if customers are drawn to Apple’s new low prices on ebooks, it’s actually possible to envision a world in which Apple’s ebook market share rises — under the terms it didn’t want.

  1. I’m not convinced Apple even cares that much about ebooks, or at least not till the DOJ intervened. And even though they have very deep pockets I doubt Apple would have bothered to price-match Amazon in the wholesale model. It’s just not Apple’s style to sell anything at a loss. Amazon, OTOH, is more than willing to lose money on the sale of certain ebooks if it helps build their customer base.

    Steve Jobs talked about going “thermonuclear” on Android/Google. Perhaps the DOJ intervention changes things but I figure Apple is as likely to completely abandon ebooks and the iBookstore as they are to play a long-term game of price-matching Amazon and losing money on most transactions.

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    1. Thanks for the comment, Joe. I guess we’ll see in the long term. Right out of the gate, they’re playing the price-matching game (at least on new bestsellers) but we’ll see if that continues. It’s going to be very interesting to watch over the next few weeks, and as Simon & Schuster and Hachette sign new contracts with retailers.

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      1. Doesn’t Apple get 30% no matter how it is priced? What difference does it make to Apple?

        At any rate, perhaps I do not understand iBooks. I thought, the publishers are selling directly through to the consumer and Apple takes 30%. Isn’t that how it works for record labels? Apple, the only middleman, reviews the book to make sure it meets the file standard and stores the copy for download.

        I presume that Apple merely “accommodated” the publishers to limit pricing, in order to have a limited number of price categories, something Apple likes aesthetically. Now that has been ruled invalid, Apple has no price categories and the publisher puts it up at whatever is competitive. Does Apple care if the book sells at $1 as long as Apple gets its 30 cents?

        Again, maybe I am wrong. I thought the whole point of iBooks was that Apple was merely a transit point, not a retailer like a bookstore.

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  2. I can never see my buying my books on Apple. If I lose my Kindle, I can pick up a new one for $70 or read my books from a web Browser. If I lose my iPad, I’m locked out of my content until I spend several hundred dollars on an iOS device. Amazon’s efforts to put their Kindle App on as many platforms as possible, not just their own hardware, is what wins my business.

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    1. I agree that it is an odd and inconvenient decision for Apple not to develop a desktop component to iBooks. But your last statement is a bit curious: iPad is open to all reader apps including Kindle, etc. Kindle is closed to anything but Amazon (for reading and purchasing). Yes, both tablets and readers can read PDF files. Isn’t iPad simply more valuable as a consequence? Also, I would argue that comparing dedicated readers to dynamic tablets for cost isn’t a good discussion.

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      1. @David Thomas:
        No, Kindle is not closed to anything but Amazon. It’s true you can’t install APPS to read other formats on a Kindle, (but who needs them)? You CAN buy books from other sources in .mobi or .prc format, which the Kindle does read. Smashwords.com is one of those sources. Authors and publishers also often provide files in mobi format. The vast majority of the other sources do not apply digital rights management to the files. You can now also get public domain books in mobi format free from Project Gutenberg and other sources.

        There are also conversion apps that will take an unlocked (no digital rights management file) and convert from one format to another, for those who know or can figure out how to work with such apps.

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      2. @David Thomas
        Good point, and I agree that the iPad is more valuable, which is why it costs more. However I was talking about buying content, not hardware. I will happily buy the iPad for the reasons you describe, but I don’t like being locked into it in order to get my content. If I lose my iPad, I do not want to have to immediately spend several hundred dollars just to see my stuff again. The Amazon model gives me far more flexibility and is much more customer friendly.

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  3. It is interesting to note that the article is locked in to Apple and Amazon while Barnes & Noble and their Nook library of content is not even being considered as a pricing alternative.
    http://entertain247.blogspot.com/2012/09/apple-and-amazon-competition-heating-up.html

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    1. Thanks for the comment, Andy! I considered the other retailers more thoroughly here and also linked to this post above: http://paidcontent.org/2012/09/10/that-was-fast-amazon-is-already-discounting-harpercollins-ebooks/

      The reason I am focusing on just Apple and Amazon in this post is that Apple really hasn’t had to compete on ebook pricing up to now, because it hasn’t sold ebooks through a non-agency, MFN model before. To @Yacko’s point above, we don’t know exactly what types of contracts Apple is going to work out with Hachette, HarperCollins and Simon & Schuster now but the settlement rules that those three publishers cannot have sign new agreements that include MFN clauses for five years. They can’t guarantee Apple that it will have the lowest price on their ebooks as they were able to do before the settlement. That means that Apple has to start actively competing on ebook prices.

      TOC’s Joe Wikert, above, is arguing that Apple really is not interested in doing this long-term; he thinks Apple won’t want to be in price-matching wars with Amazon forever. We’ll have to see what happens, but the reason I chose to focus on the two companies in this post is that it’s a new dynamic for them. (Sites like B&N and Kobo and Google have been competing with Amazon on wholesale books all along.)

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  4. While I agree with Mr. Wikert — Apple will just cede bookselling to Amazon rather than subsidize e-book prices to compete in the long run — it is most important to bear in mind that price alone does not dictate higher book sales. Just because a book now costs a few dollars less through the iBookstore doesn’t mean it will sell more copies. Demand (for books) is primarily created by forces outside of price. And before cranks jump all over me answer this: does an increase in demand *lower* the price of an e-book? Sure, hitting a bestseller list will make that happen, but all discounting is a dealer discretion — its not the vendor that reduces the prices. Price will make a consumer choose *where* to purchase a specific title, or *when*, but variations of a few dollars between asking and purchasing costs does not necessarily influence the volume sold. I hear the opposite argument a lot, and the tendency is to point to an anecdotal outlier rather than consistent identifiable evidence.

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  5. Michael W. Perry Tuesday, September 11, 2012

    It just came to me that Amazon may live to rue the day it met with DOJ lawyers and sent them after Apple.

    Why? Keep in mind the differing market dynamics.

    1. Amazon feels it has to meet or beat any price that Apple sets. This gives Apple the ability to control Amazon’s pricing. If Apple sells at a loss, then Amazon must do so too. In the past, that’s been Amazon strength. Now it’s their weakness.

    2. Apple, with its large profit margins, has far deeper pockets than Amazon. This means that, all other things being equal, Apple can afford to sell at a loss for much longer than Amazon.

    3. All things aren’t equal and the differences favor Apple, specifically:

    a. Ebooks purchased from Apple can only be displayed on its iDevices (not even Macs). That means that, while Apple can force Amazon to sell to everyone on any platform at a loss, Apple only loses money on customers who’ve already bought one of their iDevices.

    Assume, for instance, that Apple has a 10% market share for below cost ebooks and Amazon a 70% market share. That means that for every $10 million that Apple looses, Amazon will loose $70 million. It’s not hard to figure out who can play that game the longest.

    b. Apple makes a hefty profit on each ebook-ready iDevice it sells. It can treat its losses on ebooks as simply one of the costs of selling iDevices much like it gives away apps such as iPhoto for free. On the other hand, Amazon either loses money or just breaks even on its digital readers and has to distribute its iDevice and Android readers for free.

    Amazon’s marketing scheme, selling hardware at or below cost and making up the difference by selling ebooks for a nice profit, completely collapses if Apple forces them to sell many popular titles below cost. Amazon loses money on both its hardware and its ebooks. That’s no way to run a company.

    Amazon’s only remaining move, as I see it, is to concede to Apple the lowest price in many cases, particularly on bestsellers. It will then try to make a market on those who can’t or won’t buy an Apple iDevice.

    *****
    Since this Apple Contingency Plan just came to me a few minutes ago, I finally understood what’s perhaps the reason why Apple hasn’t created a way to view their ebooks on anything but their mobile devices. If you’re interested in profiting on hardware and not ebooks, it’s a sensible move.

    In a pinch, this lets Apple sell ebooks below cost without bearing the frightful burden in losses that Amazon will face. And if Apple wins, the generally, lower-than-Amazon ebook prices will become another selling point for iPads, particularly among rabid readers.

    And that cheers me up a bit. I really don’t like the idea of Amazon, Apple or anyone owning this market. As a writer, I’d rather they all be eager to do my bidding and not vice-versa.

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    1. I’m not a fan of either Amazon or Apple (Apple’s recent lawsuit about rectangle phones with rounded corners and other such generic things annoyed me as someone who chose to buy an Android rather than an iPhone, and I hate Amazon’s attempts to destroy physical bookstores and marginalize print books, when I prefer bookstores and read print exclusively) so this could be amusing to watch…. I do love Barnes & Noble and the publishers and hope they don’t die in the process. :(

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    2. That is indeed a intriguing line of thinking and you may be right. Interesting times ahead.

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    3. Which makes you wonder why Apple was (still is) so adamant on the agency model in the first place eh?

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  6. No retailer can compete on price with Amazon, even the mighty Apple…so in this regard I agree with @Joe Wikert. It’s not Apple’s style to sell at a loss…well, at least not their devices. But they were a major force in changing the economics of the music industry. What must always be remembered in these discussions is the fact that all the major online book retailers are also device makers. How much time a user spends shopping and enjoying content on a device is as important to this new breed of retailer as what the reader paid for the content. No device maker can ignore the necessity to keep its hardware loaded with all types of fresh, affordable and engaging content. Amazon’s movement into ad subsidized eReaders is another examples of ways retail/device makers can monetize content. In my opinion, the only way Apple or any content retailer can take on Amazon (and reverse the downward pressure on the price of books also caused by the economics of abundance) is to create an online shopping experience that changes the value proposition for books. The place readers buy their books must also become the place where readers gain access to authors, bonus content as well as other readers interested in the similar genres and topics. A new type of social commerce must emerge where relationships and dialogue enhance the storytelling experience and add value to the “book.”

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  7. New Kindle Fire HD Tuesday, September 11, 2012

    I think the fight with amazon tablet its self is not easy at all
    check it’s specs right here
    http://newkindlefirehd.blogspot.com/2012/09/why-new-kindle-fire-hd-4g-is-best.html

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  8. Apple is never known to compete on selling the “cheapest” anything. I think Apple would rather focus on textbooks than competing with Amazon if pricing war gets really silly. It’s a much bigger challenge for B&N than it is for Apple to keep pace.

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    1. Well, you’d be wrong then.

      Apple be price-cuttin’. It’s happening.

      Barnes and Noble, OTOH, doesn’t need to keep pace with these two. Apple prevents their ebooks from working on the Nook. Amazon prevents their ebooks from working on the Nook. That means Barnes and Noble can sell ebooks to their own customers at a profit.

      Then they can use the proceeds from that to keep undercutting Amazon and Apple on hardware prices, creating even more profitable customers.

      The battle for low ebook prices is silly- piracy is free regardless of whose “ecosystem” you are locked into. Amazon and Apple are just throwing money away when they sell at a loss.

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    2. Apple has made it clear that it will not leave a price umbrella below which competitors have safety from Apple’s competition:
      http://seekingalpha.com/article/842641-apple-pricing-policy-pricing-power-and-profit
      Look at how low pricing has become on the lowest-end iPods, and the fact iPhone 4 is now “free with contract”. Apple is more than willing to compete at lower and lower prices. With the world’s largest online store (iTumes, App Store, Apple Store) Apple may even be in a position to achieve lower per-transaction costs than Amazon. Electronic content may not be a field in which Apple is doomed to sell second behind a “wholesaler”.

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  9. “Doesn’t Apple get 30% no matter how it is priced? What difference does it make to Apple?” @Yacko

    Exactly. Apple will not care if all eBooks are sold for three dollars. They get their 30% share. Apple has never been a company driven solely for profit. That was not the ethos which was created by Jobs and has been passed onto Ive.

    Apple is not a company controlled by salesmen. It is driven by innovators. Apple iBook’s content is not merely supplied by large publishing companies.

    _______

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    1. “Exactly. Apple will not care if all eBooks are sold for three dollars. They get their 30% share… Apple is not a company controlled by salesmen. It is driven by innovators. Apple iBook’s content is not merely supplied by large publishing companies.” @Ron Taylor
      Apple’s 30% transaction fee surely only works under the agency model where the publisher sets the price… if Apples is now setting customer prices themselves AND taking a third of that price then that just allows them to set prices artificially low without any penalties – which would be an innovation, but not a good one.

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      1. Apple’s new wholesale contract with HarperCollins isn’t for 30%, which is why it can discount the book without impacting HarperCollins’ business. HarperCollins can’t allow deep discounting without limits, or it’d go broke on vendors selling its content for peanuts while it bled marketing funds and editorial overhead. The move from agency to wholesale included a move from fixed retail pricing to fixed wholesale pricing. Apple can’t price it below wholesale without a loss, and why would Apple do that? Apple’s money is in the device, not the content.

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    2. No. That pricing scheme is only apps. They don’t make the 30% on music or books. Just apps.

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  10. Spot on, Laura. I’ll take it one step further. I think Apple has a good shot of being #1 in ebooks within three to four years. Apple rarely celebrates their ebook accomplishments or brags about their progress, yet behind the scenes they’re ripping up the ground and earning market share. They’re poised to earn much more. They have a lot of dry powder to bring to bear at the time of their choosing, and I’m not talking cash and balance sheet. They, like Amazon, are the patient chess masters. They tolerate being misunderstood and underappreciated (and benefit from it). They know where they’re going and how to get there.

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    1. authorscottnicholson Wednesday, September 12, 2012

      Don’t see how Apple can possibly win here. “Let’s sell at the same lower price so people will buy more expensive devices upon which to read!” Apple cares nothing about books–they just played the agency game for the publicity, which is less important now. And when Amazon is giving away a free Kindle with a year’s Prime membership–which will certainly happen by next year if not by this Christmas–it’s hard to see where Apple even stays in the game on books.

      Then again, Apple has never really pretended to be an ereader.

      Scott Nicholson

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  11. I think everyone is missing the point on Apples side of eBook pricing. Apple wanted the agency model cause it guarantees a profit on each book sold. Apple does not sell anything at a loss. If they had to buy their inventory from the publishers then they’re vulnerable to Amazon’s low prices. Apple just wants to sell book, and become the default online market place taking 30% of all online transactions regardless of the actual price, is still huge money. Publishers of books and movies have been more reluctant to give up control because they believe the music industry “lost” control to Apple. The reason you haven’t seen book and movie sales take off online the same way music did is the high prices these industries are trying to demand for their virtual goods. I still won’t buy a ebook for $10 when I can get it ebook from the library for free.

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  12. What I don’t hear in conversations about this lawsuit is the voice of authors. Consumers may revel in lower prices, and the race to the price bottom as various distributors fight over market share, I wonder what happens to the income on the creators on whose back these publishers ride. Will they be able to make up lost royalties per book in volume or will authors, whose income on the whole has never been great be beggared so that fat cats like Apple and Amazon can enrich themselves further??

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  13. I think this article is way too premature. Apple is still operating under its old contracts, which give it the ability to match prices and still receive a profitable cut. By this, Apple is doing nothing different from what it has always done in its ebook marketplace. It has no risk in cutting prices under the current agency contract.

    Write this article again in a month when Apple is operating on a wholesale contract like Amazon.

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    1. This is not correct. Apple is operating under a new contract with HarperCollins, as dictated by the settlement. We don’t know what kind of cut Apple is taking (it may not still be taking a 30% commission), and with the publisher setting the books’ list price (which they can still continue to do, even under the new arrangement), when Apple sells the books at a discount it is in fact doing something very different from what it has previously done in the ebook marketplace.

      Apple couldn’t cut prices before, only the publisher could. The settlement allows Apple (and other retailers) to discount as much as they want (though publishers have the option to negotiate the condition that the retailer does not sell the publisher’s entire line for less than the entire commission it receives). Nor do Apple and publishers have to make wholesale contracts.

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      1. “Apple is operating under a new contract with HarperCollins, as dictated by the settlement.”

        Do you have evidence of this? That they have a new contract ready does not mean they are operating under it yet. The settlement dictated 7 days from acceptance of the settlement. That has yet to pass, and if Apple is not operating under the new contract, that 7 days may get stayed by a court action–Kohn has filed a motion for just this, and Apple has hinted that it may do the same, probably in an emergency motion to the Second Circuit.

        “Apple couldn’t cut prices before, only the publisher could.”

        Incorrect. Remember the MFN clause? That gave Apple the right to match any other retailer’s price, which is a price cut made by Apple. Apple appears to be doing just this, which if it is still operating under its old contract, it has every right to do and without risk of selling below cost. What Apple could not do was unilaterally cut prices on agency titles without the the reason of price-matching.

        “Nor do Apple and publishers have to make wholesale contracts.”

        This is semantically incorrect. Agency allowed the distributor to set the final price and keep that price firm. If the retailer is paying a set price at the wholesale level and has the ability to discount, it is a wholesale model, else anything with an MSRP would be considered agency pricing.

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      2. 1) “Apple is operating under a new contract with HarperCollins, as dictated by the settlement.” Do you have evidence of this? — No, you’re right that we don’t know for sure that Apple is operating under a new contract. However …

        2) You’re right that the MFN clause meant Apple could drop its prices to match others. However, as I wrote here yesterday (http://paidcontent.org/2012/09/11/the-price-drops-begin-what-do-harpercollins-ebooks-cost-now/) what actually happened yesterday was that Apple first priced two bestsellers at $9.99, and Amazon dropped *its* prices to match later in the day. There’s no reason for Apple to pre-emptively drop prices under the old contract.

        3) “Nor do Apple and publishers have to make wholesale contracts. This is semantically incorrect. Agency allowed the distributor to set the final price and keep that price firm.” — Agency means that the publisher sets the price and the retailer takes a commission. Agency pricing has been effectively declared legal and can continue now as long as the publisher doesn’t restrict discounting. Call the new model “agency lite” (as Michael Cader is calling it) or whatever, but it’s not exactly wholesale; Judge Cote distinguishes between the two in her acceptance of the final settlement.

        She writes, “The Government and critics of the settlement dispute whether the decree effectively disallows agency pricing and therefore dictates a particular business model. The Court states no opinion on this issue as it is largely semantic and irrelevant to the disposition of this matter. The terms of the decree speak for themselves: they disallow restrictions on retail discounting for two years subject to certain limited exceptions.” (p. 16) Later she writes “In other words, even through the relief in the decree is both well-tethered to the Complaint and narrow, it may nonetheless effectively end agency pricing for e-books” (p. 29) — but not necessarily.

        The important part of continuing this limited type of agency for publishers is that they still pay retailers a commission and can negotiate with retailers “a commitment from an e-book retailer that a retailer’s aggregate expenditure on discounts and promotions of the Settling Defendant’s ebooks will not exceed the retailer’s aggregate commission under an agency agreement in which the publisher sets the ebook price and the retailer is compensated through a commission.”

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      3. 2) Apple has an X.99 pricing policy (or it did back in April 2010). It does not price anything ending in any other number. Thus, it’s price matching does not equal a true price match unless the matched price equals something ending in X.99. I’d be willing to bet good money that Apple’s price match policy under the old contract (that I assume it is still operating under) allowed it to drop down to the next lowest X.99.

        That is why you saw a price drop below 10.94. A 10.99 price would have placed Apple at a disadvantage. A 9.99 price would have kept to its X.99 business model. Amazon went to 10.94, Hence, Apple went to 9.99.

        3) Which is why I said semantically incorrect. Anytime a retailer can discount but pays the same wholesale price, it is hard to call the model agency. The distributor is just suggesting the price, and the retailer chooses or declines to accept the price. That is wholesale in 99.9% of the retail world.

        In summary, I find it hard to believe Apple would exit its contract early, a contract which gave it no risk against a wholesale model–because of the MFN, it always received a 70% cut (and thus profit). What I see is the old contract is working as it intended, and the price matches are not some new play by Apple but the old contract clauses kicking in to allow Apple to price match.

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  14. Who is really selling at a ‘loss’? No one. The paper book model worked like this.

    New book $25 retail. Shipped on consignment (!!) which means the retailer didn’t pay till it sold. AND, if it sold, they kept 50%. And, that’s a paper book which likely cost $3 or more to print and ship. So, the publisher got a max of $$9.50 and had to pay the author. If the books didn’t sell, they got ‘remaindered’ and the publisher had to take them back (pay the shipping) or the $25 book was sold for $6 or less in the bookstore. VERY inefficient. And, the author had to wait 18 months to get paid (and was often cheated at that).

    The digital model has no printing, no shipping, no leftovers (often as high as 30% of a run for a hit book and 95% for a stiff). Sales are transparent and the author and publisher can get paid right away.

    So, if Amazon or Apple take $3 on a $10 book, the publisher is getting $7 and can lower overhead dramatically in the bargain (trucks, warehouses, etc.). Not much different than the print model. Just faster and easier for everyone.

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