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Will Publishers Ever Make Money Off eBooks?

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BNReaderBarnes & Noble’s (s BKS) launch of a full-scale ebook challenge to Amazon (s AMZN), including a deal to be the exclusive ebookstore provider to Plastic Logic’s would-be Kindle-killer when it’s released next year, means the emerging market for digital books will finally see some real competition. That’s good news for publishers concerned over Amazon’s iTunes-like dominance of the ebook business.

But not as good as it could have been, for Barnes & Noble’s pricing is keeping ebooks firmly in the loss-leader category, at least for the time being.

While Amazon has never disclosed the number of Kindles it’s sold since they were introduced in 2007 (analysts estimate it at roughly 1 million), the Kindle is clearly the most popular dedicated ebook device in the U.S., with a market share of at least 80 percent, probably higher. Thanks to the Kindle’s proprietary technology, however, there’s only one way for publishers to reach that audience of avid readers: through Amazon’s ebookstore (unless they’re willing to sell ebooks without DRM, of course, as most publishers are not).

Just as Apple (s aapl) did with its walled garden around the iPod, Amazon has used the leverage of its captive audience of Kindle users to set retail prices for ebooks. And, like Apple, it has set those prices largely to advance its own strategic interest in selling Kindles, not to maximize revenue for publishers.

Thus most new bestsellers at Amazon’s ebookstore can be downloaded for $9.99, less than half the list price most carry in hardcover. But Amazon still pays publishers a wholesale price of $12-$13 for those books, a loss-leader retail price that is quickly becoming the industry benchmark for new ebooks — to the deep chagrin of publishers, who worry that wholesale prices will eventually be dragged down as well. Google (s goog) managed to bring a smile to publishers’ faces in June when it announced plans to launch an e-commerce platform for ebooks allowing publishers to sell directly to consumers at prices of their own choosing. But the big “get” for publishers was always going to be Barnes & Noble, the world’s largest bookseller and Amazon’s toughest potential competitor.

So what has Barnes & Noble done? Essentially, it’s gone and adopted Amazon’s pricing structure. Monday’s announcement boasts that the new Barnes & Noble e-book store will feature “hundreds of best-settlers” at — you guessed it — “only $9.99.”

The news isn’t all bad for publishers. Unlike Amazon, Barnes & Noble is pursuing a multiplatform approach that could greatly expand the universe of digital readers even without the boost from Plastic Logic, ultimately loosening Amazon’s grip. The Barnes & Noble eReader app is already available on the iPhone and iPod Touch and will run on other mobile platforms as well, including BlackBerrys (s rimm), in addition to Mac and Windows-based PCs. B&N also supports the open ePub standards developed by the International Digital Publishing Forum, which many publishers are adopting for their digital supply chains. Amazon does not support ePub, meaning publishers need to maintain a separate Kindle supply chain.

E-books are also cheaper for publishers, of course, because they eliminate paper, printing and shipping costs. So in the short term, margins might actually improve. But the bottom line for publishers is that the price of a new ebook bestseller is now set for the foreseeable future at $9.99. Industry rumors that Amazon might be considering a price hike for bestsellers to $12.99 can now be put to rest, as can any hope publishers might have had for gaining pricing leverage over the Kindle maker. Amazon is not going to raise prices in the face of new competition.

Pressure on wholesale prices is now likely to get more intense, in fact, not less, as two big buyers scramble for market share. As the market gradually shifts from print to digital, the stage is now set for sustained downward pressure on book prices. That’s good news for readers. But for publishers, it’s tough to sustain earnings momentum when your top line is going down, no matter how good your margins look on paper.

Of course, the ebook market is still tiny — less than 1 percent of the total publishing revenues — so there’s plenty of time yet for publishers to get their costs in line.

Paul Sweeting writes The Media Wonk blog and is author of an upcoming report on the e-book market for GigaOM Pro.

20 Responses to “Will Publishers Ever Make Money Off eBooks?”

  1. Missy Reed

    I say no they won’t make any money as ebooks are created so easily nowadays who needs publishers? The authors can write, create and sell their own ebooks without the need of a publisher. The real market on who is going to make money on ebooks is the authors and the marketers who get that ebook noticed and sold. Unless publishers will be doing more of that then the actualy printing etc. that they so now then no, they will not be making any money in the ebook world. Although, it could be an exciting addition into the publishers world to add internet marketers on staff as a different way to “publish” the book. Their full time will not be in actual publishing but promoting. Maybe this is how they will have to adjust to stay in this type of world. I for one think it would be great for a publisher to query me for a change and ask if they can promote my book for a precentage. You never know!

  2. José Couto Nogueira

    I realy dont get it. Why publishers dont make money on ebooks? In a printed book the publisher has the fabrication expenses (layout and printing), stock expenses, distribution expenses, and doesn’t get the money right away; the books stay in the stores and the stores can send them back after a while. All this expenses disapear in the ebook, except for layout. There no stocks, no printer to pay and no payements delayed – almosto no risk, one could say. So, even if the ebooks are sold at half the price (of paper) there is stil a profit, maybee an bigger one.

  3. mjw149

    I really think the potential is there in an O’reilly subscription style offering of technical manuals for corporate customers. They just need to get ebooks into the enterprise. And that means interfacing with pdfs, google apps and ms sharepoint so that the ebooks replace physical printed copies of books and reports. Once that toehold is established, then the publishers will rake in dough. I think casual fiction type deals are a declining category for profits. Too many other options for entertainment. As a programmer, I’d consider an ebook for work use, since it’s so nice to have a second screen for quick convenient reference. But oh!, the prices. It makes sense for my company to do it, since they have to pay for all the printing we do. But, from my perspective, I get unlimited free printing, and that kills the value proposition for me to buy an ebook. Of course if I traveled more away from the printer, I would do it.

  4. There are two issues here. First, B&N’s decision to enter the e-reader market at this stage is, in the classic euphemism, “brave”.

    Second, will publishers make money from e-books? No, and that’s the wonderful thing about e-books. They will help hasten the relandscaping of the literary terrain. Distributors will make money, hardware manufacturers may or may not make money (they are much more likely to make their actual money by locking people in via subscription so that people’s Kindle coems free or discounted with a bundled book subscription); and authors will make money. And one day sooner rather than later, all three will wake up and say “hang on, just what do publishers do?” And then the induistry might be able to drag itself in to the modern wolrd


  5. Michael–I think there is potentially room for niche players, but I would emphasize potentially. We already see Amazon working with the largest textbook publishers, for instance, to get Kindle DX devices into the hands of college students in an effort to capture that market for e-books. I think a lot depends on how closely devices remain connected with particular storefronts. In an Amazon world, there’s not much room for niche players. But if open standards prevail, and any storefront can interoperate with any device, then there might be room.

    Allen–I’m not sure I see how it’s self-contradictory, but I absolutely agree that there are other stories waiting to be told here, including whether booksellers can make the numbers work for them. Certainly on its face Amazon’s e-book pricing strategy would not make sense if it could not sell Kindles at a profit. Among the things we don’t yet know are the details of B&N’s deal with Plastic Logic. I think it’s a fair bet that money will be changing hands from Plastic Logic to B&N, at least initially. Whether that takes the form of B&N selling Plastic Logic readers itself, or getting a commission or devices sold by others, or through some other arrangement we don’t know. But there’s clearly more to the story to come.

  6. “Will Publishers Ever Make Money Off eBooks?”.

    I think you mean: “will [booksellers] ever make money off of eBooks?”

    Otherwise this story is self contradictory.

    • I’m a full time independent writer, most of my income comes from eBooks actually. Hundreds of my readers have only ever seen my work on their cellphones (mostly through Amazon owned, who already do very well on smart phones). I think there’s a great future in eBooks and I don’t think we’ve seen the end of the big players yet. Over the years I’m fairly certain someone who specializes in eBooks will join the players we’re seeing now. I don’t think we’ve met them yet, since eBooks are still in their infancy. I’m looking forward to it though.

  7. Michael Wolf

    It seems like eBook retail storefronts could eventually come down to three to four majors: Amazon, Barnes & Noble, possibly Apple and possibly Google. Paul, do you think that there is room for more than that, particularly in a niche/segment like student/college publishing or religious titles (or do I have to wait for your report to find out :)