Apple Entry into Market Means Higher eBook Prices

For the past two years, online retailer Amazon.com has dominated the eBook market with its innovative Kindle devices. But Amazon's biggest eBook innovation—the low cost of eBooks—might soon be a thing of the past, thanks to Apple's new iPad device. The reason is that Apple, aping its iTunes Store model, will allow publishers to dramatically raise prices on eBooks. And Amazon might have no choice but to raise prices as well.

The publishing industry has long complained about Amazon's consumer-friendly pricing practices. Whereas new hardcover books often sell in the $20 range at retail, Amazon wanted to establish its Kindle as the de facto eBook platform. So, it priced most new eBooks at $9.99, a much more attractive price that drove book lovers to Amazon's reader.

What's interesting about Amazon's approach is that it actually loses money on each $9.99 Kindle eBook. That's because, today, publishers sell new eBooks at the same price to retailers as they do hardcover books. Amazon's bet was that by establishing a standard, it could later negotiate with publishers to lower the price. This strategy would benefit Amazon, of course, but also the millions of readers who purchased Kindle devices.

Apple's entry into the eBook market with the iPad tablet device and its integrated iBooks eBook reader software has ruined this opportunity. Utilizing the tiered pricing model it provides for other content on the iTunes Store, Apple has presented the world's biggest publishers with a higher price range for eBooks than Amazon has. And hoping that Apple would be able to defeat Amazon in this market, virtually all these publishers have jumped on board.

The result is much higher prices to consumers. And these higher prices come across the board:

Higher prices for the device. The iPad comes in six models that cost from $499 to $829 per unit, compared with $259 for the Kindle. Amazon also sells a higher-end Kindle DX for $489, still less than the least expensive iPad. Of course, the iPad is far more than an eBook reader, but then it should be at those prices.

Higher prices for wireless access to the device's online bookstore. When consumers purchase a Kindle, Amazon provides them with free 3G wireless access to the Amazon online store so that they can purchase content on the go. This access also works internationally, so travelers can purchase books effortlessly overseas, albeit at a small per-purchase price. Meanwhile, iPad users must utilize Wi-Fi, purchase books on PCs, and transfer them via USB, or pay AT&T for 3G wireless, at a cost of $15 to $30 a month. And this 3G connection won't work internationally (though other carriers will offer similar plans to customers who purchase iPads in other countries).

Higher prices for books. Although Amazon pioneered a consumer-friendly $9.99 pricing structure for new books, Apple is allowing publishers to set their own price, and most have indicated that they're more interested in a $14.99 starting point for new books.

While Apple was negotiating this coup with the world's biggest publishers, one of those publishers, Macmillan, demanded that Amazon raise prices on its Kindle books to match Apple's prices. Otherwise, Macmillan threatened that it would delay electronic publication of new Kindle books for several months so that customers would be forced to buy more expensive hardcover books (or utilize Apple's iTunes Store).

Amazon responded to this threat last week by temporarily pulling all Macmillan titles from its Kindle store and Amazon.com website. But on Sunday, the retailer caved, saying that—in the end—it had to allow Macmillan to set prices if it wanted to stay competitive with the new Apple entry.

"We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles," Amazon wrote in a statement to customers. "We want you to know that ultimately, however, we will have to capitulate and accept Macmillan's terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books."

What Macmillan got out of Amazon was the same deal that the five biggest publishers—Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group, and Simon & Schuster—got from Apple: New eBooks will sell for at least $12.99 to $14.99, and the seller (Apple, Amazon) will get a 30 percent commission.

And what consumers will get out of this Apple entry, of course, is higher prices. Yet another innovation for which we can thank Steve Jobs, and that's true whether we use a Kindle or an iPad.