economics

January 29, 2010

Apple Tablet Portends Rewrite for Publishers

By JEFFREY A. TRACHTENBERG

Book publishers were locked in 11th-hour negotiations with Apple Inc. that could rewrite the industry’s revenue model after the technology giant unveils its highly anticipated tablet device Wednesday.

Apple’s new multimedia tablet device, with a 10-inch touch screen that is expected to deliver video, text, navigation and social-networking applications, is trying to change the way much of traditional media is delivered.

For the book industry, the Apple tablet is bringing to a head a brewing battle between Apple and industry heavyweight Amazon.com Inc. over how e-books—seen as the future of the book industry—will be priced and distributed.

Apple’s business model for books, which the company has kept under tight wraps, shifts the focus away from the bargain-basement prices Amazon has made popular, according to publishers that have met directly with the company. Apple is asking publishers to set two e-book price points for hardcover best sellers: $12.99 and $14.99, with fewer titles offered at $9.99. In setting their own e-book prices, publishers would avoid the threat of heavy discounting. Apple would take a 30% cut of the book price, with publishers receiving the remaining 70%.

Apple’s vision is at odds with Amazon.com, which has shaken the book industry by slashing prices of e-books on its Kindle reader and making the $9.99 e-book bestseller a fixture.

The Apple tablet aims to reshape many corners of the media industry, just as Apple’s iPod revolutionized the music business when it made its debut in 2001. Apple has been in discussions with television networks, magazines and videogame publishers about featuring their wares on the device. On the eve of the launch, it wasn’t clear to some people briefed on the matter whether Apple had made a final decision about wireless connectivity or the carriers involved.

Many television networks remained skeptical of Apple’s proposal to sell a “best of TV” subscription service under which customers would pay a monthly fee for access to programs. The networks are concerned about disrupting their relationships with cable and satellite-TV companies, which pay billions of dollars in annual fees to the networks.

[BOOKS]

Among major publishers, News Corp.’s HarperCollins Publishers was in serious negotiations with Apple late on Tuesday to appear in the starting lineup for the tablet, set to be unveiled at a news conference in San Francisco Wednesday morning. News Corp. also owns The Wall Street Journal.

In the newspaper and magazine industry, several executives were in the dark about how their content would be distributed and priced. Without much detail, some publishers have been readying electronic editions that could be adapted for the tablet.

Many media executives said they expected to get more clarity in meetings with Apple executives after Wednesday’s presentation. While some of the largest publishers may not be up on stage Wednesday, their books could appear on the device when it is shipped in March.

Harold McGraw III, chief executive of textbook publisher McGraw-Hill Cos., said on an analyst call Tuesday: “In the near future you will undoubtedly see a McGraw-Hill e-book for the college market running on an Apple tablet.” McGraw-Hill isn’t expected to be part of Wednesday’s unveiling.

Apple declined to comment on its pricing model or any aspect of the new device.

Publishers will likely have to choose between Apple and Amazon. While Amazon has established a dominant position in e-books with its cut-price titles and popular Kindle, publishers are anxious that consumers have come to expect such prices. By allowing publishers to set their own prices, Apple is enabling publishers to re-set the rules and reach a broad audience.

Aware of the threat, Amazon has been on its own offensive. In series of meetings in New York last week, the online behemoth made it clear to publishers that it is opposed to the Apple pricing model, according to people familiar with the situation. “This is as intense a situation as the industry has ever had,” said one publisher.

Amazon typically pays publishers about half of the cover price of a new hardcover book for e-book bestsellers. For example, Andre Agassi’s recent memoir, “Open,” has a hardcover price of $28.95, which means the publisher likely received about $14.50 for the e-book edition. Since Amazon today sells that e-book for $9.99, the bookseller is losing about $4.50 on each sale—a hit Amazon has been willing to take to build a dominant market share in e-books and power sales of its Kindle reading device. An Amazon spokesman declined comment.

The Apple model would bring in less revenue per title for publishers and authors. Since Apple will take a 30% fee on sales, a $14.99 e-book will generate $10.49 for publishers. That publishers and authors stand to make lower revenue per book sold on the Apple model is one reason some are hesitating about signing up with the tablet.

But there is nevertheless a strong draw: In adopting the Apple model, the balance of power would shift at least partly back to publishers, which regain control of pricing. In setting higher prices, they could provide a level playing field for all e-book retailers. The potential for publishers is that the device may generate greater volume for e-book sales. “The reason why publishers will consider this is to bring in Apple as a major distributor of e-books,” said the publishing executive. “The gamble is if Apple comes to the table with their sexy device and their millions of customers, will they dramatically increase the e-book business the way that Kindle did?”

Amazon has unsuccessfully battled Apple before on pricing in the music industry. Even though Amazon has consistently undercut Apple on prices of digital music, it has made little headway in building market share.Since Apple’s iTunes store, software and iPod work seamlessly together, few users see a reason to involve a third party retailerIn publishing, however, Amazon has had the advantage of being first to the game.

Michael Serbinis, CEO of Kobo Inc., an online e-book retailer, said that the new pricing model could add significant profitability to the e-book retail structure. “A good chunk, at least 20% to 30% of your e-books, are sold at a loss. This could bring up gross margins closer to those on physical books.”

Whether publishers will be willing to risk a breach with Amazon is unclear. “Amazon is a dedicated book channel, a longtime retail partner,” said Arthur Klebanoff, co-founder of New York-based RosettaBooks LLC, an e-book publisher. “Is there tension between the major publishers and Amazon today? Yes. But there are many overriding reasons why they will find resolution.”

—Russell Adams and Shira Ovide contributed to this article.

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