If anyone ever wonders why legacy businesses often have difficulties competing against new ones, the current changes in the book industry should prove helpful. Jeffrey Trachtenberg's article in The Wall Street Journal from a few months ago, "E-Books Rewrite Bookselling," says this about the changing landscape:
E-books have turned the economics of book retailing upside down.
When it launched the iPad last month, Apple championed a new approach to e-book pricing. Earlier this year, most large publishers agreed to establish a so-called agency model, where the publisher receives 70% of the digital price while e-book sellers act as agents and receive 30%. While some best sellers remain at $9.99, many major authors are priced at $12.99 or $14.99.
For many digital booksellers, the new model is good news: Instead of having to pay publishers half, or $12.50, for the e-book edition of a $25 hardcover book, and then sell that book at a loss—for, say $9.99—to match Amazon's cutthroat prices, the bookseller now gets 30% of the newly-set $12.99 price, or $3.90. Since it hasn't paid anything for the title, it is ahead of the game.
But for Barnes & Noble, the model can't hide a brutal reality: $3.90 is a fraction of the $12.50 it now earns on a full-priced hardcover priced at $25. If e-book sales become a quarter to a third of the market, store revenue would plunge.
This is a point that I made in a prior article about Barnes & Noble but it's worth reiterating. Bricks & mortar bookstores have used the $12.50 they used to earn, to pay for the physical bookstores, employees, etc. With a collapse down to $3.90, the fate of companies like Barnes & Noble, Borders, Chapters Indigo (Canada) and so forth depends on if they can develop a business that survives on $3.90 versus the former $12.50 and/or they can reduce costs.
On top of all this, it's not clear to me if e-books are a winner-takes-all business—many Internet service industries are! If there is only room for one, it'll be a tough battle for someone like Barnes & Noble or Chapters to dislodge Amazon. Tags: Barnes and Noble (BKS)