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Originally published Monday, December 24, 2012 at 4:06 PM

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Predicted e-book price war has yet to fire shot

After four major publishers settled a price-fixing suit brought by the Justice Department, the industry expected to see a plunge in prices. That hasn’t happened, largely because the triumph of e-books over their physical brethren is not happening so fast.

The New York Times

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Right about now, just as millions of e-readers and tablets are being grabbed from under Christmas trees, there was supposed to be a ferocious price war over e-books.

Last spring, the Justice Department sued five major publishers and Apple on e-book price-fixing charges. The case was a major victory for Amazon, and afterward there were widespread expectations — fueled by Amazon itself — that the price of e-books would plunge.

The most extreme scenario went like this: Digital versions of big books selling for $9.99 or less would give Amazon complete domination over the e-book market. As sales zoomed upward, even greater numbers of consumers would abandon physical books.

The major publishers and traditional bookstores were contemplating a future that had passed them by.

But doomsday has not arrived, at least not yet. As four of the publishers have entered into settlements with regulators and revised the way they sell e-books, prices have selectively fallen but not as broadly or drastically as anticipated. The $10 floor that publishers fought so hard to maintain for popular new novels is largely intact.

Amazon, for instance, is selling Michael Connelly’s new mystery, “The Black Box,” for $12.74. New best-sellers by David Baldacci and James Patterson cost just over $11.

One big reason for the lack of fireworks: The triumph of e-books over their physical brethren is not happening quite as fast as forecast.

“The e-book market isn’t growing at the caffeinated level it was,” said Michael Norris, a Simba Information analyst who follows the publishing industry. “Even retailers like Amazon have to be wondering, how far can we go — or should we go — to make our prices lower than the other guys if it’s not helping us with market share?”

Adult e-book sales through August were up 34 percent from 2011, an impressive rate of growth if you forget that sales doubled every year for the last four years. And there have been more recent signs of a market pausing for breath.

Norris said Simba, which regularly surveys e-book buyers, has been noticing what it calls “commitment to content” issues.

“A lot of these e-book consumers aren’t behaving like lab rats at a feeder bar,” the analyst said. “We have found that at any given time about a third of e-book users haven’t bought a single title in the last 12 months.”

Another, more counterintuitive possibility is that the 2011 demise of Borders, the second-biggest chain, dealt a surprising blow to the e-book industry. Readers could no longer see what they wanted to go home and order.

“The print industry has been aiding and assisting the e-book industry since the beginning,” Norris said.

It is possible that Amazon, which controls about 60 percent of the e-book market, is merely holding back with price cuts for the right moment. The next few weeks are when e-book sales traditionally take a big jump, as all those newly gifted devices are loaded up with content.

The Seattle-based retailer declined to comment beyond saying, “We have lowered prices for customers from the prices publishers set on a broad assortment of Kindle books.” Barnes & Noble declined to comment on its pricing strategy.

The question of what is the proper price for e-books has shadowed the industry ever since Amazon introduced the Kindle in late 2007 and created the first truly popular portable reading device.

Amazon had a natural impulse to build a market and was an aggressive retailer in any case, so it took best sellers that cost $25 in independent bookstores and sold them for $9.99 as e-books. Consumers liked that. E-book adoption soared.

James McQuivey, a Forrester analyst, wrote two years ago that digital book sales would be $2.8 billion by 2015, up from a mere $169 million in 2009. “A very altered publishing world is about to emerge,” his report said. (He said last week that he was not tempering his forecast.)

Publishers, however, did not want to see their product sold so cheaply by Amazon, which would speed accelerate the shift away from the printed books they still depended on. With the help of Apple, they introduced a new system that gave them greater control over prices, which went up.

The Justice Department found this to be illegal collusion, and in April sued.

After the suit was filed, Amazon said it looked forward to lowering prices. The industry braced itself. The Authors Guild predicted the end of the embattled physical bookstore.

“Amazon is committed to capturing the U.S. book market by forcibly moving it online, where it can more easily eliminate its competitors,” the guild wrote. Paul Aiken, the guild’s executive director, did not return calls for comment last week.

As the summer wore on and publishers negotiated with the government, Amazon customers began asking why they did not immediately notice a change.

“It seems to me that the Kindle books have gone up,” D. Amick wrote in a typical comment on an Amazon forum.

Some say they never expected a price war at all.

“The pricing war hasn’t happened because Amazon can’t afford it,” said Nate Hoffelder of the Digital Reader, a site devoted to e-book news and opinion. “The money Amazon lost on e-book discounts in 2008, 2009 was covered, at least in part, by the high price of Kindle hardware,” he said. “Now that the Kindle is being sold so cheap, Amazon no longer has the hardware income to act as a cushion.”

This is debatable — Amazon has always devoted itself to market share rather than profitability — but it is undeniable that the cost of e-readers has plunged much more than the cost of e-books. When the Kindle made its debut it was a big hit at $399. The cheapest model is now $69. Barnes & Noble is selling its cheapest Nook for $79, off 20 percent.

Even as prices fall, though, the dedicated e-reader is losing steam. The market peaked last year, with 23.2 million devices sold, IHS iSuppli said in a report this month. This year, sales will be 15 million.

Jordan Selburn, senior principal analyst for consumer platforms at IHS, said the migration from e-readers to tablets puts Amazon in “an interesting position” with e-book prices.

“Amazon does not make much off the hardware,” he said. “Its goal is to sell you content. When they sell you a Kindle Fire tablet, they are not just selling you books but movies, diapers, garden hose. It’s a portal into their entire store.”

But one day, Amazon must try to make a profit. “In the era of the tablet, the difference between a book and diaper disappears,” Selburn said.

Perhaps there will be loss leaders, but more likely each product will have to carry its own weight. In other words, this might be as cheap as e-books will ever be.

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