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Even as readers grow more comfortable with digital books, some continue to question why so many of the most popular new e-books are priced so

Even as readers grow more comfortable with digital books, some continue to question why so many of the most popular new e-books are priced so high.Michael Connelly's recent legal thriller, "The Fifth Witness," has more one-star reviews on Amazon than five-star reviews in part because some angry reviewers focused on the e-book's $14.99 price.As physical book sales fall, publishers' fixed costs are becoming more cumbersome. One area major publishers can cushion the blow is by keeping e-book prices higher. "If e-book prices land at 99 cents in the future we're not going to be in good shape," said one New York publishing executive, who asked not to be identified.Indeed, e-book prices on many new national best sellers are higher today than they were at the start of last year. That's because the six major publishers have adopted a new pricing model, known as "agency pricing," championed by Apple Inc. AAPL 0.98% Publishers, worried about the deeply discounted $9.99 digital best-sellers promoted by Amazon.com Inc., AMZN 2.15% agreed to set the consumer prices of their digital titles. Under this model, retailers act as the agent for each sale and take 30%, returning 70% to the publisher. The major significance of agency pricing was that it made it impossible for a retailer to discount the price without the approval of the publisher. The impact was immediate. Amazon had built its market share in part on aggressive price discounting in which it actually lost money on the sale of many of the book industry's most popular titles.For example, if a new hardcover book was priced at $26, the digital wholesale price was often $13. If Amazon sold the book for $9.99, it lost $3.01 per sale.

Although many books continue to be sold at $9.99 or less, the wild days of using the country's most popular titles in digital form as loss leaders are mostly over. For example, Stephen King's coming thriller "11/22/63" is priced at $35 in the hardcover format and $16.99 as a digital book.Publishers argue it's impossible to break out a profit per title that includes a percentage of all their costs because all books have unique one-time costs which are broken out over an unknown number of copies. It's also hard to apply corporate overhead costs against the sales of individual titles. Assigning a fixed overhead percentage is an accountant's convenience, not a fact, says Mike Shatzkin, chief executive of the Idea Logical Co., a New York-based publishing consultancy.

But a back-of-the-envelope calculation of a new e-book priced at $12.99 on Amazon or through Barnes & Noble Inc. under the 70%-30% agency pricing model suggests a return of $9.09 to the publisher in the form of sales. The publisher then typically has to pay the author 25% of net sales in the form of a royalty, or $2.27. This leaves a gross of $6.82. Subtract 90 cents for digital rights management, digital warehousing, production, and distribution, and that leaves $5.92.

By comparison, a hardcover book priced at $26 and sold under the traditional wholesale model will return $13 to a publisher. Subtract 15% for the author royalty, or $3.90, and that leaves a gross of $9.10, says publishing executives. Mr. Shatzkin says that it's appropriate to then deduct about $3.25 per copy for shipping, warehousing and production, leaving a gross per unit sold of $5.85, from which publishers must pay for returns and inventory. The fact that digital books don't have returns and inventory reduces some of the publisher's risk and makes digital an attractive format, says Dominique Raccah, chief executive of Sourcebooks Inc.

Neither of these examples includes possible deductions for unearned advances or marketing.It's unclear that lower e-book prices always result in revenue gains from additional sales. But publishers are likely to face more pricing pressure down the road.But "over time there's bound to be pricing pressure because there will be more and more self publishing efforts at lower efforts offering a wider range of choices at lower prices," says Mr. Shatzkin.

Answer the following questions:

a) How do the resources required for distributing hardcover books compare to those of distributing e-books?

b) How would a move from distributing hardcover books to distributing e-books likely affect the degree of operating leverage for the retailer? For the publisher?

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