E-Books: The Future Is Here

Amazon reports that sales of e-books have finally surpassed sales of hardcovers.  That's a pretty momentous development.  I think it not only means that e-books are entering the mass adoption phase, but also that the price-discrimination model that publishers have used for decades may be on its way out.  There's no significant benefit to buying most disposable mass-market books in hardcover; people do it because they don't want to wait for the paperback.  In theory, they should be willing to pay extra to get a "new release" rather than wait a year, but in practice, people are surprisingly resistant (and have become more so, I think, as the furor over the iPhone price cuts revealed).  They're willing to pay up if you can give them some superficial reason that they are getting a superior product (like, um, a hard, unwieldy version).  But they scream bloody murder when they find out that they paid too much for the same model.  A year is too short to discount the book, but it's hard to sustain a publicity drive much beyond that.

If I'm right, the big question is whether prices will settle closer to the hardback or the paperback level.  I'd guess much closer to paperback--in fact, the "excess" profit may disappear entirely.  On the other hand, publishers have considerable pricing power, so that remains to be seen.

Many people will be surprised to learn from Amazon's release that the iPad has not yet killed the Kindle.  It may have killed the Kindle's profit margin, but the product itself is going strong:

In a statement Monday, Amazon's chief executive, Jeff Bezos, also countered the perception that sales of the company's Kindle e-reading device had suffered due to competition from other devices, such as Apple Inc.'s iPad.

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He said the growth rate of Kindle device sales had "reached a tipping point," having tripled since the company lowered its price to $189 from $259 last month, following a similar move by competitor Barnes & Noble Inc. to cut the price on its Nook e-reader.

Amazon said Kindle device sales accelerated each month in the second quarter--both on a sequential month-over-month basis and on a year-over-year basis. But the statistics that Amazon shared were all relative--it didn't share actual sales figures. The company has never said how many Kindle devices or e-books it has sold.

Barnes & Noble, the nation's largest bookstore chain retailer, also has "seen a big uptick" since it cut the price of its Nook e-reader, a spokeswoman said.

I now have an iPad and a Kindle, and while I think the Kindle reader for iPad is terrific, the device itself is too fragile for many uses, and the shinyness of the screen is a serious problem, because I can't easily use it outside, or even in front of a big window.  I wouldn't want to have just one or the other. 

And ultimately, I'm not sure how much Amazon cares how much profit it makes on the Kindle--the machine is a way to sell more content, not a profit center on its own.  So far, Apple is trying to pull all of its profit out of the device, not the content stream, but I wonder if that will last.  The more powerful Apple gets, the more disenchanted the hard-core tech fans become.  Meanwhile, they're getting stronger and stronger competition from devices like the Droid, which may push their margins down the way they pummeled the margins on the Kindle.

If Apple needs to pull more revenue out of its content stream, it will be interesting to watch.  They haven't positioned themselves as the low-cost or the high-performance provider in that space; everyone I've talked to with an iPad reads their books on the Kindle reader, not iBooks.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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