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There’s been some kerfuffle recently about Amazon losing two dollars on every ebook they sell. Publishers are arguing, among other things, that $9.99 ebooks will lead to authors not writing books. Other ebookstores are calling Amazon’s price point “predatory.” Frankly, I don’t buy too much of that, nor the whispers that ebook retailers will have to raise prices. And I’m more than a little skeptical about the $2 loss figure.

Instead, I see all this as evidence that the hardcover is dying. The $25 hardcover book is every bit as unsustainable in a digital world as $18 CDs were ten years ago. And good riddance. It’s a terrible business model that will only lead to entrenchment in non-digital strategies and financial heartache for the publishing industry.

Let’s take a closer look.

Numbers point to publishing clinging to hardcover business model

I’m by no means a publishing expert, but here’s what these much-ballyhooed numbers say to me. The $2 loss per book figure is based on reports that publishers are hardlining Amazon and wholesaling ebooks for $12 each. If you were to add in a bookstore cut of 40% of retail price, that means the publishers expect Amazon to sell these ebooks for $20. That’s a “hardcover ebook” price, and entirely ridiculous.

Amazon was built on selling cheaper books thanks to lower overhead. They essentially killed the idea of full-priced new release hardcovers, and now most bookstores offer at least 10% to 20% off the ticket price.

$9.99 ebooks are the natural evolution of that business model. Ten bucks makes perfect sense as a price point for the digital edition of a paperback, a few dollars less than the print version. The publishers’ problem is that they want their hardcover money, which also shows up in their new plan to delay the release of ebook editions for four months, which essentially pushes them back into paperback territory and preserves the false scarcity of the hardcover version.

Publishers even claim that, without money from hardcover sales, authors won’t be able to write good books anymore. (That one makes me laugh. By my estimate, 99.9% of books published are mediocre to terrible. But don’t get me started on quality.)

All this adds up to publishers believing that hardcover sales are the lynchpin of their entire business, and will be forever. That means that, in an industry that’s slowly dying (and needs saving), profitability is only achieved by milking the enthusiasm of their biggest fans. By these publishers’ rationale, the whole industry is based on hardcore fans not wanting to wait a few months for a half-priced paperback edition, and publishers inflating new-release prices. That’s frightening.

The greener pastures of ebook publishing

For argument’s sake, let me propose a business model that embraces ebooks and rejects the notion that publishers can’t profit without hardcovers.

Accept the fact that you’re going to wholesale ebooks for, let’s say, $6 per copy, and Amazon will then sell them for $10. Six bucks is a dollar more than TBI Research’s proposed ebook wholesale price, and makes the gross profit, according to their calculations, almost the same as the print model, within about 10%. Ten percentage points sounds pretty good to me for a stable digital model in a time of transition.

Also, TBI’s numbers assume that 90% of print copies are sold, which is high. With digital book sales, loss on unsold copies is much lower, and that takes out a lot of the risk of the current print model, in which profits on hardcover bestsellers subsidize losses on back-catalog misses.

The ebook model also has the double bonus of encouraging people to buy books and not punishing their biggest fans with inflated initial prices. The publishing industry isn’t doing enough of that kind of thing.

The long and the short of this is that ebooks will be profitable in different ways than print books. Different business models and practices will have to be developed to make epublishing work. And the sooner major publishing houses stop whining about losing hardcover money and embrace digital books, the more money they’ll make.

News of the $9.99 ebook’s death has been greatly exaggerated

I also don’t think Amazon is losing money, overall, on ebooks. I don’t know the extent of the $12 wholesale pricing, but I would guess it’s limited to fresh, new, hardcover bestsellers. I’m sure they buy plenty of older ebooks for less than $12, and I think they’re making plenty of money.

When BooksOnBoard’s Bob Livolsi called Amazon’s price point “predatory,” I think he was misdirecting the blame for all this. His argument was: “It’s an attack on literature so Amazon can control the industry.” Of course, it’s not an attack on literature, but it could be construed as an attack on non-Amazon ebookstores and ereader producers. Wal-Mart does the same thing with Mom and Pop stores, they sell everything below cost until the competition is forced to close its doors.

I’m going to do something I rarely do, and give Amazon the benefit of the doubt. I think they’re trying to put pressure on publishers to lower wholesale costs for ebooks, which is actually good because Amazon’s the only one with enough market clout to effect a change. Of course, Amazon won’t commit entirely to these negotiations, because that would involve refusing to buy books for $12 wholesale, and they want to keep their high percentage of “bestsellers available for Kindle” intact.

There’s also nothing to guarantee that Amazon won’t lock in exclusive preferential wholesale prices, and leave third parties like Livolsi out of the loop. But for now, the publishing industry needs the greatest possible incentive to embrace ebooks and leave their hardcover pricing schemes behind.

Besides, even Amazon’s print hardcover prices wouldn’t support buying books wholesale for $12 each. The top two bestselling print books on Amazon right now are (shudder, shudder) Going Rogue, priced at $14.50, and The Lost Symbol, at $12. Both are hardcovers, both were recently published (Palin’s just a month ago), and each one’s “list price” is more than twice what it’s actually selling for. I’m going to go out on a limb and say that Amazon’s buying both of these for less than $12 wholesale, and that not a single person in the country paid full list price for them.

Imagine if the record industry forced customers to pay $29 for an LP of a new album, and didn’t release the mp3s until four months later. It’s ridiculous because it flouts the realities of modern media technology. Adapting to new technology is like adapting language: just because “irregardless” rubs you the wrong way, that doesn’t mean it’s not in the dictionary. You can say it’s not a word, but you’re wrong.

Independent epublishers are already making money (and paying higher royalty percentages) selling $10 ebooks through storefronts like Fictionwise, which takes 40% of the retail price. If they can do it, why not Random House?

And, for the record, none of this means that hardcovers are going to disappear. If publishers embrace ebook first-runs, they’ll still be able to sell their precious hardcovers, but as an option for hardcore fans instead of a way to shake down avid readers whom they’ve got over a barrel. Just like LPs.