The Kindle Chronicles

Publishers have been battling Amazon (AMZN) over the price of e-books, only to get outflanked by Wal-Mart (WMT) last week on the bread-and-butter best-sellers. In an effort to boost traffic on Wal-Mart.com, the Bentonville, Ark., retailer is offering select hardcovers that are among the most anticipated of the season for $8.99. Who saw that coming?

Not the publishing world. Book people are easily spooked. And their first line of defense is to hyperventilate. That’s what literary agent David Gernert did in the New York Times when he claimed, “[P]ublishing as we know it is over” if readers come to expect hardcover best-sellers for $9 at Wal-Mart, Amazon, and Target (TGT) (which matched the offer.) He feared the low price would turn readers off to literary books at $25: “I think we underestimate the effect to which extremely discounted best-sellers take the consumer’s attention away from emerging writers.” But instead of fretting over first novels, publishers and agents should latch on to this development as a way to restructure the economics of the industry to everyone’s benefit.

In truth, there are no barriers to success in the book business. Publishing is ruthlessly efficient. Books that excite readers take off; those that don’t disappear fast. There’s no evidence that John Grisham crowds out the great American novel. In fact, it’s quite the reverse. What the industry lacks are products that excite readers. Where publishing is brutally inefficient is the process by which it selects products and allocates resources. And those toxic assets—all the unearned advances—are paid off by the best-selling authors. Stephen King, John Grisham, and the Freakonomics guys cover the cost of failed books.

So fighting the low-priced book—either electronic or hardcover—is a red herring. Consumers are already accustomed to paying varying prices for different editions of the same title. Many a book sells well in the higher-priced trade paperback form even when a cheaper mass market edition is available. The same is true for hardcovers, in many cases. More to the point, Costco trained customers to expect to pay half the cover price on hardcovers and paperbacks many years ago. The impact on independent bookstores—the entities that supposedly support and nurture emerging writers—and chains has been profound but is hardly new.

Wal-Mart’s loss-leader campaign only emulates what Amazon and Costco have already done: Use cheap books as a signal of value. It has seen how successful books can be for customer loyalty, especially among women, who compose the majority of shoppers and readers. The discounts will be very hard for Wal-Mart, Target, and Amazon to sustain because they must purchase the book from publishers for more than they charge customers. But watch out. Like Amazon’s 40 percent discount on best-sellers and the 50 percent discount by other physical retailers, the overall trend in the book business has been toward price deflation. Wal-Mart can keep the cuts up if it arranges a deal that allows the publisher to sell books to the giant on more favorable terms. So, once again, it is the very success of books—a medium no one supposedly cares about any longer—that continues to erode the economics of the publishing industry.

The combination of slow sales and squeezed margins is enough to make any publishing executive queasy. Perseus CEO David Steinberger explained it to the Wall Street Journal: "If you are taking margin out of the supply chain, it will eventually put pressure on everyone in that chain." Publishers are afraid that if Wal-Mart, Amazon, and Target can make that $9 price stick, they’ll be forced to lower their wholesale prices. They don’t think the big writers will take less money up front. So they’re freaking out that the lower price point will come out of their profit margin. Publishers need that margin to pay off all the overpriced advances that lie like a dead hand on publishers’ profits.

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Dan Gross, my colleague at Newsweek and Slate, pinged me the other morning after he had read the reports that Sarah Palin’s new book—suddenly announced for next month—would not be available as an e-book. Gross, a pioneer in e-book publishing long before Tina Brown, had noticed that Palin’s publisher was following Ted Kennedy’s by holding off on the e-book format. Ever alive to a budding trend, Gross figured two important instances presaged something more than a coincidence. Could I, Dan wanted to know, provide a third case, and was this preference on the part of publishers for withholding the e-book on the biggest titles an economic issue? (Gross’ column on this point can be found here.)

I replied that I did have a third example that proved the rule—Dan Brown’s The Lost Symbol—but the principle it revealed was less about the digital format and more about the role physical books play in the publishing industry.

Dan Brown’s publisher had been happy to supply the title in digital form. That allowed The Lost Symbol to sell more digital copies on the first day at Amazon than physical copies. This is because the thing of great value on the first day of sales was actually reading the book. (Merely owning it was not enough.) That’s something you can do whether you’ve read the book on paper or your Kindle.

With a big personality book, however, having read the book is far less important than owning it. These books are talismans, powerful objects that carry the aura of the person they’re associated with. That aura doesn’t attach to an e-book. You need something more substantial, at least something physical. When you buy a Kindle edition of a book, no one knows you’ve got it, no one can see you read it across an airplane aisle, and no one can admire it on your coffee table.

Another reason publishers are avoiding e-books for authors who sell their own fame is that the book itself is a bit of a luxury item. At $35, Kennedy’s publisher doesn’t want the e-book, with its $9.99 price, tarnishing the value of the physical book. Even if you don’t by the physical book for full price, you’re always going to feel ripped off by that $9.99 price being out there.

There’s nothing particularly new about talisman publishing. But a turning point came when Hillary Clinton released her book Living History in 2003. Here was a title bought for $8 million on the near-explicit premise that she would come clean about her husband. But in the time between the book deal and publication, Clinton had won a Senate seat and begun to position herself as a presidential contender. The idea that her book would be anodyne or unburdening was now laughable.

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