Will Publishers Ever Make Money Off eBooks?

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.