Amidst news of Amazon’s apparent surrender today in the war with Macmillan over ebook pricing, the highlighted book on Macmillan’s home page is Priceless, subtitled “The Myth of Fair Value (and How to Take Advantage of It)”:

I haven’t read the book so can’t comment on whether this placement is intentional or ironic, but it does tee up a discussion about the “collective hallucination” of Macmillan’s pricing. 

The tiff between Macmillan and Amazon is over who sets end customer ebook prices.  Amazon wants most books to be priced at $9.99 and is today selling ebooks at a loss to realize that price.  Macmillan wants dictate ebook prices for end customers (in other words, no discounting by resellers) and will treat its resellers as “agents” who get a fixed 30% of the sale.  In Macmillan’s own words:

Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digital media businesses). The price will be set the price for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.

Macmillan lets you buy Priceless in hardcover from their site for the full $26.99 list price and provides links to other resellers including Amazon.  They would no doubt say they sell at full list price because they don’t want to compete with their resellers.  When you click through to Amazon tonight, they still aren’t taking orders but third party sellers on Amazon offer it new for as low as $14.41.   Now Priceless (at least before this blog post…) is not exactly a blockbuster title, so lets look at The New York Times Bestseller list on Amazon:

Amazon also isn’t selling The Checklist Manifesto tonight, which is the only Macmillan book to make the list (you’d think as one of the “big six” publishing houses Macmillan would have a better showing, but maybe they’ve been focused on things other than publishing popular books).  But for the rest of the list, list prices average $27.71 and range between $24.95 and $32.95, while Amazon’s average price is $14.18 and range between $11.50 and $17.96.  You average 49% savings off list from Amazon.

The net is, at a $14.99 list price for a new ebook, Macmillan wants to actually increase the effective price of new books to end customers even as the cost of cutting down trees, making them into paper, putting ink on that paper, putting those books in trucks and shipping them all over the place to stores disappears from the equation.  The savings, needless to say, are not being passed on to you and me.  Macmillan evidently sees themselves as a lone exception to the deflationary pressure of the Internet.  We’ll see how that goes.

If it is not obvious, the big loser here is not Amazon, but the we the consumer:

To the degree Amazon is paying over $9.99 for ebooks today and subsidizing them, then they’re actually much better off margin-wise under this model.  The question is what happens to volume and Amazon clearly believes there is price elasticity for new books (and so do I, speaking purely as a consumer).  Macmillan meanwhile believes they can roll out a new book at $14.99, sell to everyone who will pay at that price, and then slide down the demand curve and pick up all the purchasers who were holding out for $14.98 or $13.99 or whatever.  They will be profit maximizers like the world has never seen before.  We’ll see how that goes.

Amazon waited too long to drop to the 30% revenue share Apple pioneered with iTunes and let Steve “all music should be priced at $0.99 a song” Jobs suck at least some of the publishers into his reality distortion field.  Jobs even seems to have had advance knowledge of Macmillan’s ultimatum to Amazon.  It is hard to see how other publishers don’t follow and put a damper on the ebook market overall. 

I’m too lazy to pull links from Apple playing hardball previously with record companies and movie studios who wanted to set their own pricing in iTunes, but the degree of Apple involvement here appears significant.  Despite the soft sell on iBooks at the iPad announcement, they seem to take Kindle very seriously.  It will be interesting to see to what degree they impede the current Kindle app for iPhone/iPod Touch that should also work without modification on the iPad.

I have a few questions for Macmillan:

• Do you really believe dynamic pricing/yield management is the best model for your business?  After all, it has worked so well for those paragons of profitability, the airlines, one of the few industries that makes publishing look good by comparison.
• How does your marketing model change if you’re doing dynamic price reductions?  Do authors have to go out on additional book tours at what increment of price reduction?  Every penny?  Quarter?  Dollar?
• When will you be instituting the agency model for your dead tree channel?
• How much more money will authors make per book under this model?  After all, they have to like getting a royalty on a $14.99 book that sells in $9.99 volumes.
• How do I short your stock?  Evidently Macmillan has already been captured by an organization that sounds like it was at the Battle of Stalingrad:

Macmillan in the US is a group of publishing companies in the United States held by Verlagsgruppe Georg von Holtzbrinck, which is based in Stuttgart, Germany.

Disclosure: I need to get around to commenting on/lampooning the FTC’s vague requirement that bloggers disclose commercial relationships, but in the meantime I hold no stocks of any of the companies mentioned in this post.  Amazon pays me pennies if you buy books that I link to, which I then spend on more books, though I anticipate buying fewer books from Macmillan in the future.  I might read Priceless (click here to tell them to make it available for the Kindle).