Analyst: Amazon Will Lower Kindle E-Book Prices Slowly, Strategically

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Wall Street sent Amazon shares tumbling on February 1.

By Jeremy Greenfield, Editorial Director, Digital Book World, @JDGsaid

Consumers looking forward to never paying more than $9.99 for an e-book may have to wait longer than anticipated.

Now that Amazon has the power to control more of its Kindle e-books’ prices, it will lower them slowly and strategically, according to a books-industry analyst from Forrester Research, Inc.

According to James McQuivey, Ph.D. and principal analyst at Forrester, Amazon has become accustomed to the 30% cut it gets from selling e-books under the agency model and won’t immediately transition all of those gains into losses when switching some agency books to the wholesale model, where Amazon was reportedly buying e-books from publishers at $13 or more and selling them to readers at $9.99 or less.

“Amazon is going to want to bring prices down but they’re going to do it strategically,” said McQuivey. “Amazon will lower prices with some best-sellers first, but they’re not going to cut across the board.”

Amazon will soon have the power to discount many of its best-selling e-books from the largest U.S. publishers, a power it didn’t have just a few days ago. Yesterday, the Department of Justice filed a lawsuit against Apple and the “agency five” publishers alleging an e-book price-fixing scheme. Three of the publishers– Hachette, HarperCollins and Simon & Schuster – settled with the DoJ and will be imminently moving away from the agency model of pricing where they set the prices with Amazon and split the proceeds.

“This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” said Amazon spokesperson Drew Herdener yesterday of the settlement.

While consumers who may have been reluctant to pay $12.99 for Guilty Wives (a Kindle top-100 title from Hachette) may be happier to pay $9.99 or less for it if and when Amazon decides to discount it, they will feel the price pain from the giant e-tailer in other ways later in 2012, said McQuivey.

“At the end of 2012, the consumer will see that Kindle e-book prices have come down but it may come at the expense of Kindle devices not being as cheap later in the year as they might otherwise have been,” he said.

Amazon’s razor-thin profit margin is to blame, according to McQuivey.

In 2011, Amazon generated $862 million in profit – normally a healthy number for any business. That profit was earned on $48.08 billion in revenue, however, giving Amazon a 1.8% profit margin, down from 4.1% a year ago.

On February 1, the day after Amazon announced its 2011 earnings, Wall Street sent its stock tumbling 10%. (The share price has since recovered to nearly January 31 levels after a strong rally in March during which it reached its 2012 high.)

“They don’t have the flexibility on prices because real-time razor-thin margins and that means that they will make some strategic price cuts on the e-books themselves but not across the board, because they can’t afford to,” said McQuivey.

Write to Jeremy Greenfield

Complete coverage of the Justice Department e-book lawsuit on Digital Book World:

Amidst Justice Department Lawsuit, Kindle E-Book Prices Rise Sharply

Compliance Requirements for Publishers That Settled: Everything But Ankle Monitors

On the Dinner Menu: Fishy Discussions about “$9.99 Problem”

Hachette Settles With DoJ, Admits No Involvement in Conspiracy

Statements From DoJ’s Eric Holder and Sharis Pozen on DoJ’s E-Book Price-Fixing Suit

HarperCollins Settles With DoJ Over Pricing

Lawyer Who Filed Complained Against Apple, Publishers makes Statement on DoJ Suit

Deep Dive Into DoJ Suit

Macmillan CEO John Sargent: ‘Macmillan Did Not Collude’, Macmillan to Fight DoJ Suit

Department of Justice to Make Announcement on ‘Significant’ Antitrust Matter Today

As Macmillan, Apple Prepare for Lawsuit, Justice Department Is Open for Last-Minute Talks

 

 

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4 thoughts on “Analyst: Amazon Will Lower Kindle E-Book Prices Slowly, Strategically

  1. I doubt they’ll immediately drop things down to the prices they were pre-agency, but I bet they immediately implement an algorithm that keeps the Kindle price at least $2 less than the current hardcover price. It wasn’t so much the actual price, but rather seeing the HC cheaper than the Kindle version that ALWAYS sent me to the library rather than my wallet.

  2. Do these commenters have amnesia? Amazon NEVER sold everything for $9.99 or less, it was only for NYT best sellers and some others: a small fraction of everything in the store. There were many more books that listed at the publishers retail price, $11 and up, that Amazon made clear profit on. So we’re going back to that. Pricing is always ‘strategic’ with Amazon, they are not throwing money away arbitrarily, and they make their money on selling content, not devices. So I think we’ll still see reading device prices going down, and even ‘free’ with purchase of store credit.

  3. Ebook sales cannot total more than $500 million at Amazon, assuming that it has 50% or so marketshare on $1 billion or so of ebook sales. 4.1% of that is $20 million, about 2% of Amazon’s overall net (in a lean year). I continue to believe that Amazon’s pricing strategy for ebooks has EVERYTHING to do with reeling in the Prime fish, and next to nothing to do with a direct contribution to the bottom line. If the company was willing to LOSE money on ebooks before this kerfuffle began, why would they now worry about the small profit scraps that agency pricing contributes?

  4. The problem is not just the pricing for ebooks but the fact that Amazon tack a significant price increase for ebooks delivered to Europe. Apparently, they do this because of 3G costs for Kindle ebook readers in Europe, but they also do this with Kindle Fire deliveries. The Kindle Fire doesn’t have 3G and I for one am buying only a fraction of what I would like to buy just because I refuse to be ripped off like this on general principle. When you feel you are being ripped off twice: once with the 3G tax and once more with a price for an electronic book being more expensive than a paper book, you’re going to be a lot less likely to buy.

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