Why people won't pay for e-books on the iPhone

I'm not sure why, but some analysts seemed a little surprised about Amazon.com's announcement on Wednesday that it would begin offering Amazon e-books on the iPhone and iPod Touch, and move beyond the confines of the Kindle.

First of all, the company had effectively confirmed off-Kindle reading access in February, so it shouldn't have surprised anyone. Second, anybody who knows anything knows that it's all about the razor blades (the e-books) and not the razor (the Kindle).

Like the game console world, the real profits aren't in the hardware but rather the software. Yes, the Kindle 2's hot now, but to reach a larger audience, Amazon will eventually have to reduce the price for the reader and shrink its margins.

By contrast, the margins on e-books should remain pretty beefy, and you can imagine all the cost savings involved when you don't have to deal with warehousing and shipping physical books. It's a great business model.

But there's just one problem. While Amazon might be able to find a market for $9.99 books on the Kindle, the iPhone-iPod Touch world is a very different place. Very few people are willing to pay that kind of money for any sort of application, let alone an e-book.

In the Apple application world, the sweet spot for selling anything seems to be less than $4.99--and more like $.99 or $1.99. Sure, you're going to get some bestselling series with almost cult-like followings (read: "Harry Potter" and "Twilight"), but the vast majority of books being "sold" on the iPhone are very cheap--and rightly so because the overall iPhone-reading experience doesn't justify you spending $10 (or even $5) on an e-book. (See Nicole Lee's in-depth piece on comparing the Kindle 2 reading experience to that of the iPhone's).

Of course, the Kindle app isn't the first way to read e-books on the iPhone--there are already dozens of paid and free reader applications (and books-as-apps) available on the App Store. And taking a look at the list of top paid (nonfree) book or reader apps will give you an idea of how pricing works.

Books in the "Twilight" series, and one app called "50 Great Books for 10 Bucks," are the only ones in the top 20 that have a $9.99 price tag. Arguably, the perfect book for Apple's smartphone, "iPhone: The Missing Manual" (written by The New York Times' David Pogue), sells for $4.99. But it took a big hit in sales when the publisher tested a $9.99 price point.

More amusingly, Hougton Mifflin recently had the audacity to release Philip Roth's "Indignation" as an $25.99 iPhone app via ScrollMotion (it makes the Iceberg Reader). I love Philip Roth and all, but I wouldn't pay more than $2.99 to read his book on the iPhone, if that.

To be sure, with all the publicity surrounding the launch of Amazon's Kindle app for the iPhone, Amazon will get a quick boost in sales of e-books to iPhone owners. And for those who own a Kindle or Kindle 2, the idea of being able to read books from your e-book library on both your Kindle and iPhone or iPod Touch is appealing (with Whispersync, you can shift your e-books from one device to another, and even keep your reading place). But in the long run, Amazon clearly faces some pricing challenges, and I'd venture to guess that the vast majority of books that will ultimately get downloaded to the iPhone will cost less than $2.

If you haven't noticed yet, as part of the move to Kindle 2, Amazon added tons of free public-domain titles to its Kindle Store. If you're into classics and esoteric titles from the 19th century, there's lots of free reading to do.

And let me tell you: free sells. I know a little something about this because I have a book that's a free iPhone app. The book has been averaging about 700 downloads a week--and it was averaging more than that, when it first came out. By contrast, the Kindle version of the book, which sells for $3.98, is averaging about four sales a day (that currently gets you a ranking of 5,000 to 8,000 out of 230,000 books in Amazon's Kindle Store).

But while we're doing the math, here's what makes the razor model so attractive for Amazon. I get 35 percent of the $4.98 list price of the book--and Amazon gets the rest. In four days, my book has generated about $35 in revenue for Amazon. If the book were to continue selling at the same rate, it could end up putting close to $200 into the bank for Amazon this month. And I'm just a fledgling fiction writer--imagine what a known author selling hundreds or thousands of e-books would do for the company. (Interestingly, Apple's terms are much more generous: sell an e-book--or any other app--on the App Store, and you keep 70 percent of the price, while Apple takes just 30 percent. Also: Sony goes 50-50 with authors in its eBook Store.)

So, yes, selling e-books to iPhone users--and a broader audience, in general--is a good move for Amazon that will bring some nice incremental revenue. But the ultimate moral of the story is that e-books have to be cheaper and that pricing for different platforms will have to vary.

Paying $10 for an e-book bestseller on any platform is just too much, especially when the paperback versions of the book will end up costing less. Unfortunately, at the present time, Amazon can't do anything about that because it's barely breaking even on bestsellers (and might even be taking a loss on certain titles) because the publishers' list price on e-books is so high that the $10 is as low Amazon can go. (It's a different story with backlist titles, which can net Amazon a profit of a buck or two). In time, of course, as the Kindle platform becomes more popular, Amazon will be able to put the screws into publishers and bring the list prices down so it makes a profit. The fact is bestsellers on the Kindle should cost $7, while bestsellers on the iPhone should cost no more than $4.99--and probably less. Of course, it will take publishers a while to figure they can sell a lot more books at those prices, and to stop wasting everybody's time by putting out books on the iPhone for $25.99.

As always, feel free to comment. And here's a question for iPhone or iPod Touch owners who don't have a Kindle: How much would you pay for an e-book to read on those devices?