The current rivalry between Apple and Amazon, and the price war that‘s brewing is just plain bizarre. Amazon claims to currently sell most e-books for $9.99 (though prices vary widely above and below this price point), which in the opinion of most consumers is a somewhat fair price for a digital commodity. What Amazon does is buy the books at wholesale prices from publishers and sell it at $9.99, which is often at a loss. The advantage for Amazon is that this helps develop a market for its Kindle and helps popularize e-books. The publishers on the other hand are paid the wholesale price, which is quite often much higher than $9.99. And lastly the consumers gain by getting e-books at a cheap and wallet friendly price. Looks like everyone’s a winner right? Well not exactly.

Publishers it seems have big egos and are control freaks. For some bizarre reason they seem to be against making money. They insist that they should be the one’s setting the price and a low price devalues their product. (If this were true, then I think they ought to target second hand bookstores and libraries as well) In short, they’d want to charge more for their books and wouldn’t mind taking a hit on revenues just to have the satisfaction of having set the price.

Until recently, they didn’t have a viable alternative to Amazon. However, with the entry of Apple, most publishers now feel that they do. And Apple, that master marketer, doesn’t mind pandering to their egos as well. After all it knows that it can’t really meet Amazon on price in the long run. So what could it do?

Apple couldn’t bring its prices down to Amazon’s level, so it did the next best thing – it bought Amazon up to its level. It offered the Agency Model to publishers, wherein publishers get to set prices for the consideration of a hefty 30% cut. And publishers are lapping it up like crazy, and forcing Amazon to follow suit.

The end result – A crazy price war where the prices are inching upwards instead of downwards!  Apple gains from the commission and new market share, as does Amazon (albeit a bit reluctantly). The publishers lose money on sales due to the higher agency cut, but have the pleasure of setting their own nonsensical prices. The consumers and the e-book category are the biggest losers. Forced to pay almost the same price as the physical book, I really don’t know which consumer would buy e-books. Besides this, since unlike a physical book, an e-book cannot be resold or lent, the value proposition at the higher price point increasingly seems weak.

So at the end of the day, if this bizarre price war continues, I feel that e-books face the danger of once again being relegated to road warriors, geeks and die hard book fans rather than the more mainstream potential that they had begun to show. Whether this happens or not, I guess time will tell.

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