Edible Apple

The iPad hasn’t even begun shipping and yet it’s already making waves in the publishing world. First, Apple’s tried and true 30/70 revenue split with content creators was the impetus behind Amazon changing the term of their revenue split agreements with publishers just days before Steve Jobs announced the iPad. Second, a number of publishers over the past few weeks have used the impending arrival of the iPad to demand more beneficial pricing (i.e higher than $9.99) for digital versions of their products on Amazon. Indeed, it seemed as if the iPad/Kindle battle would be one of those rare instances where more competition actually leads to higher prices.

But lest you think that the laws of basic economics are outdated, the New York Times reports today that contract provisions in publisher contracts vis a vis the iPad might actually result in cheaper e-book pricing on the platform than initially expected.

Initial reports suggested that e-books on Apple’s iBook Store would be priced somewhere  between $12.99 and $14.99, significantly higher than Amazon’s traditional $9.99 pricepoint. But Apple, true to form, merely looks at e-books as a tool to help them sell more hardware, so it’s not all that surprising that it has its eyes set on cheaper pricing. In short, Apple, while at the same time willing to raise the price ceiling on e-books, is also trying to make best selling e-books as affordable as possible.

But according to at least three people with knowledge of the discussions, who spoke anonymously because of the confidentiality of the talks, Apple inserted provisions requiring publishers to discount e-book prices on best sellers — so that $12.99-to-$14.99 range was merely a ceiling; prices for some titles could be lower, even as low as Amazon’s $9.99. Essentially, Apple wants the flexibility to offer lower prices for the hottest books, those on one of the New York Times best-seller lists, which are heavily discounted in bookstores and on rival retail sites. So, for example, a book that started at $14.99 would drop to $12.99 or less once it hit the best-seller lists.

Moreover, for books where publishers offer comparable hardcover editions at a price below the typical $26, Apple wanted e-book prices to reflect the cheaper hardcover prices. These books might be priced much lower than $12.99, even if they did not hit the best-seller list.

Recently, Credit Suisse analyst Spencer Wang wrote that the emergence of other competitors in the e-book space will significantly cut into Amazon’s currently high share of e-book sales.

Near term, we suspect that the iPad and the new eBook agency pricing model, which requires that Amazon increase retail prices to be more consistent with Apple’s pricing, will provide Kindle with the most market share headwind. Going forward, we can envision a scenario where Apple, Amazon, and Google eventually split the market. Therefore, we expect Amazon’s share of eBooks business to fall from 90% currently to about 35% over the next five years.

And somewhere out there, Jeff Bezos is cursing Steve Jobs.