Publishers may suffer from cheap Kindle books

Jeff Bezos, chairman, president and chief executive officer of Amazon.com Inc, describes the Kindle at a news conference in New York. Bloomberg News

SAN FRANCISCO:Amazon.com Inc's Kindle, which accelerated the adoption of electronic books, may shrink publishers' profit margins if the online retailer gets tougher about prices it pays for digital titles.

Publishers typically earn about $2.15 per digital book versus 26 cents for a print copy, according to Sanford C. Bernstein & Co. While publishers see digital books as the future, the market is dominated by the Kindle, leaving them vulnerable to Amazon.com's bargaining power.

"We don't want it to be where you can only get your book in one spot," said Maja Thomas, senior vice-president of digital media at New York-based Hachette Book Group, a unit of France's Lagardere SCA. "We want what every publisher wants and what every author wants, which is ubiquity."

Amazon.com, which set the Kindle's price, pays publishers $12 to $13 for Kindle editions of books on the New York Times best-seller list and typically sells them for $9.99, said Paul Aiken, executive director of the Authors Guild, a New York-based group providing legal support to writers. Publishers are concerned that Amazon.com will start demanding lower prices from them so it can start making more money on digital books, he said.

Dominance

"The industry as a whole is a bit nervous about the Kindle and the possibility that Amazon will really lock up the e-book market," Aiken said. "The early path it's taken here could really determine a lot about where the industry winds up and where people get their e-books in the future."

As it stands, Amazon.com's $9.99 e-book price is unsustainably low for the company and publishers, said Claudio Aspesi, a Sanford C. Bernstein analyst in London, in a June 19 note. Amazon.com will probably raise the price it charges Kindle users to $12.50 and pressure publishers to sell electronic books for less so it can make a profit, he said.

Amazon.com is the world's biggest Internet retailer, with $4.89 billion in first-quarter sales. Drew Herdener, a spokesman at Seattle-based Amazon.com, declined to comment on the company's relationship with publishers. He also declined to discuss the company's pricing strategy and whether it sells some books at a loss.

$2 billion forecast

The Kindle comes in two versions, one for $299 and a larger $489 model designed for newspapers and textbooks. The company cut the cheaper version's price from $359. There are more than 300,000 books available on the device. It takes less than a minute to download individual titles, and a high-resolution black and white screen mimics the look of a printed book.

By 2012, Amazon.com may post more than $2 billion in annual revenue from the Kindle and content on it, said Sandeep Aggarwal, an analyst at Collins Stewart LLC in San Francisco. Amazon.com doesn't disclose Kindle sales.

Sales of electronic titles in the book publishing industry more than doubled to $25.8 million in the first three months of 2009 from a year earlier, according to the Association of American Publishers in New York. Digital books still make up less than 2 percent of total US book sales, which declined 7 percent in the first quarter, the association said.

Publishers are counting on an influx of competitors to reduce their reliance on the Kindle. Companies such as Plastic Logic Ltd and FirstPaper, which is backed by Hearst Corp, are introducing digital readers. By the end of the year, Google Inc plans to offer a program for publishers to sell e-books directly to consumers through the Web, said Gabriel Stricker, a spokesman for the Mountain View, California-based company.

CBS Corp's Simon & Schuster said last month that Simon & Schuster would work with a Web company called Scribd to sell digital books online.

ITunes equivalent

Those efforts may give publishers more options and avoid the dilemma faced by the music industry with Apple Inc. The Cupertino, California-based maker of the iPod was able to set the industry standard for songs at 99 cents as iTunes grew into the dominant music-download service.

"Publishers and authors want to make sure there's healthy competition so that Amazon and Kindle don't become the equivalent of Apple and iTunes," said Brian Murray, chief executive officer of HarperCollins, a unit of New York-based News Corp. "We want to make sure there are a number of successful companies selling e-books on devices."

Newcomers in digital readers may be able to capitalize on tensions between Amazon.com and publishers, said Sarah Rotman Epps, an analyst at Cambridge, Massachusetts-based Forrester Research Inc. In February, Amazon.com disabled a Kindle read-aloud feature after the Authors Guild complained. The Guild also criticized the company in 2002 for promoting used books at the expense of new sales.

"Amazon has not historically had great relationships with publishers," Epps said. "That's a real emphasis for Amazon's competitors. We're still early in this game."

Slow to change

As much as publishers are concerned that their profit margins will be squeezed, their distress is partly of their own making, said Alex De Groote, an analyst at Panmure Gordon & Co, an investment bank in London. Publishers have been slow to adopt digital media and need to cut their costs, he said.

"The cost structure is top-heavy with people and top-heavy with print," De Groote said. "If e-books can find a widespread audience, there is an opportunity for book publishers to take some of that cost out."

Newspaper publishers also face tough negotiations with Amazon.com. The Dallas Morning News gets about 30 percent of the revenue from Kindle subscriptions, said James Moroney, CEO of the newspaper, which is published by Dallas-based Belo Corp. That revenue split with Amazon.com is "untenable", he said.

New competitors

More competitors in the digital-delivery market may force Amazon.com to give publishers better terms, said Rich Maggiotto, CEO of Zinio, a San Francisco-based company that distributes magazines and books digitally.

"Those that are coming in are being much more friendly to publishers," Maggiotto said. "They are letting the publishers set the prices and aren't taking as much of that margin."

Gannett Co's USA Today, the biggest US newspaper, is in talks with makers of electronic readers including Plastic Logic, publisher David Hunke said.

IRex Technologies BV, a Dutch company that sells digital readers primarily in Europe, is marketing a device in the US that may let newspaper and book publishers display advertisements - something they can't do on the Kindle, said Kevin Hamilton, head of iRex's US operation.

Bloomberg News

(China Daily 07/13/2009 page11)