Pricing Kindle Books

Sometime back I wrote this model for pricing a book

Price of a book  = Content   + Consumption  + Convenience

To be correct it should read

Value of book = Content    + Convenience

Content is the information content and Convenience is ease of access of to the content based on your usage scenarios. The Consumption component is really folded into Convenience. This equation is for a given format of the book.

then we can write  price for any given format  as

Price =  F(value)   +  G(price of all other formats)

The function G() boils down to reference price. Note that this is a recursive function but its base case is the price for the current most common format, the hardcover book. The sign of G() is usually negative, in other words it prevents the publisher from capturing the full value of the book.

So how should the Kindle book be priced? Amazon wants to price most books at $9.99 but the publishers are against such flat pricing. They saw what Apple’s 99 cents pricing did to music labels and want to have better control over their pricing. Recently one publisher declined to have their book available on Kindle at the same time as their hardcover book. Other books like Dan Brown’s upcoming book may not be available in eBook format for a long time.

If $9.99 is not the price, how should the eBooks in Kindle and other formats should be priced?

Sony executive, Steve Heber used cost argument to justify the lower price tag:

Steve Haber, president of Sony Corp.’s digital reading business, says it is logical to expect that digital books should cost less, because of the lower production costs, such as for paper. “There should be significant savings” for consumers, he said.

It is quite possible Mr.Heber is using this cost argument more towards publishers to put pressure on them to reduce their  prices to Sony than as a blanket statement on pricing based on cost. Cost is irrelevant to pricing a book  or anything else and Mr. Haber knows that as well since this part of Sony’s DNA, judging from pricing  for other digital content from Sony.

A Forrester analyst, Sarah Rotman Epps,  said,

“What we’ve seen in other industries and in the evolution of digital content is that consumers are not willing to pay as much for content that is separated from its physical medium.”

I am not sure if Ms. Epps has looked at data on consumer behavior with respect to pricing for digital content. But I disagree with her assessment.  First, the low price expectation for digital books comes not because of separation of content from physical medium but due to low reference prices set by other free digital books. Second the new medium, eBook reader, is not net negative it adds several convenient factors that increase the value to the consumers.  Customers are willing to pay for convenience and willing to pay for it.

Now questions arise, whether the value added by eBook format comes from the format, the distributor  or the device and how this value should be shared by the three. In Amazon’s case they are both the distributor and the device maker and they captured significant part of the value through Kindle pricing. Publishers are afraid, based on iTunes history, that  Amazon with its Kindle store and  Kindle reader will gain upper hand in the value chain. They are going to seek out other distributors, like Google, who allows them to set prices.

Are the publishers losing out on potential eBook sales by refusing to release in that format at the same time as the hardcover book? According to The New York Times article, eBook sales are 1-2% of total book sales. So if these eBook readers want to read the latest books in their Kindle or other readers then they should be willing to pay for the convenience.

The net is, this is  new battle in the publishing value chain. Amazon wants to win the platform  battle with its set pricing but this is far from over. New players like Google is already in the fray and we should expect other players like Adobe and Microsoft to enter as well.