Kindle, iPad, MacMillan, and the Death of a Business Model

Of course, this could be a sign that Steve Jobs is just smarter than Jeff Bezos, but Bezos is no slouch. If we assume that everyone involved is smarter than we are, how could this possibly make sense?

The key is the mainstream publishers' worry that e-books will cannibalize the sales of physical books. Mainstream book publishers, along with mainstream music publishers and the legacy media newspapers, are actually primarily manufacturers. The costs of the content, in royalties to the authors, are only about 10 percent of the cover price of the book, and less than that for the record. It's the costs of setting type or mastering, printing the books or pressing the disks, shipping, cataloging, and selling them that dominates the costs of publishing.

Now, along come e-books and readers, like the Kindle and the iPad. Suddenly the whole business of publishing has changed. You can sell a physical book or an e-book -- but each copy of the e-book costs literally one one-millionth as much to produce.

What Apple and MacMillan and the others are doing is trying to preserve their existing business model by forcing the price of e-books to be high enough to not cut too badly into the physical book market. What Bezos and Amazon are doing is trying to cut the price of e-books to encourage adoption.

Who is going to win? Bet on Bezos. The mainstream publishers can hold on for a while, based on reputation and while e-readers aren't widely available; there's still some prestige to being published by a reputable publisher like MacMillan. But eventually, some publisher will realize that a book that would have sold for $29.95 in a physical edition can be sold for the cost of the royalty, plus a small markup for production and administration. Our $29.95 novel would sell instead for $3.95. When that happens, except for coffee table books and an occasional print-on-demand hard copy, the physical book is dead.

This weekend kerfuffle is really the death throes of a business model -- traditional book publishers trying to preserve their traditional publishing methods for a little longer.

Half a century ago, Eric Frank Russell invented the ancient Chinese curse: "May you live in interesting times!" Confronted with the Internet, electronic books, and online publications, traditional media and legacy publishers must feel they are living in interesting times.