Found via Twitter from @Hadrien: the Conversational Reading blog remarks on a Publishers Weekly article confirming that Amazon is, indeed, losing money on every $9.99 Kindle e-book that it sells.

As the articles point out, Amazon has to pay the same wholesale price to the publishers for e-books as for print editions of those books—more or less half of the print edition price. (So do other e-book vendors; this is why even Fictionwise must charge excessive rates for books from publishers such as Random House, though they do they best they can to bring the prices down with discounts.)

Amazon then can choose to sell it for however much Amazon wants: whether it comes out ahead on the deal is entirely up to it. Thus, Amazon sells it at below wholesale, as a “loss leader”—breaking even or losing money on the deal to promote sales of the Kindle and grow its share of the market. (Giving away the blades to sell the razor, as it were.)

Thus, if a hardcover book has a suggested retail price of $24.95, Amazon pays the publisher about $12.50 for the e-book version—and loses about $2.50 when it turns around and sells it for $9.99. But Amazon doesn’t care: people look at those Kindle discounts and say, “Golly, that e-book gizmo would pay for itself in savings if I only bought a few dozen e-books.” And they buy the Kindle instead of some other reader.

This habit of Amazon’s of throwing its money away to build the Kindle market has publishers very worried. For one thing, it will get consumers used to paying $9.99 for e-books. (And indeed, there already is a movement afoot to “Boycott all [Kindle] books over $9.99!!”)

This is a strategy that could backfire on Amazon if they are unable to negotiate better rates with the publishers and eventually have to raise their prices. But it could also hurt the publishers as consumers put pressure on them to lower their prices so e-books are $9.99 everywhere.

What’s more, if Amazon corners the e-book market, it will become the “Wal-Mart of e-books”—able to dictate terms to its suppliers, and cut the suppliers off from the majority of customers if they refuse. Which will mean publishers will earn less money, and could mean authors earn less money, too.

To listen to publishers, they are squeaking by on a razor-thin margin already, and this kind of squeeze could mean the end of the publishing industry. Even though e-books do not have the printing and shipping costs associated with a book, publishers insist that these are only a fraction of the cost that goes into a book:

“The pricing in publishing has very little to do with manufacturing costs and most to do with the cost of author talent. That does not go away when you sell an e-book,” the head of one house asserted.

In light of this, it seems odd that Baen is able to sell all of its e-books, including e-books of brand new hardcovers, at $5 each (or less when they are bundled together with three to five other books and sold as a month package for $15). But then again, Baen tends to consider its e-books to be first and foremost promotional materials for selling print books—they may be treating the e-books as “loss leaders” themselves.

I was having a Twittered discussion with ArachneJericho the other day in which he asserted Amazon’s actions, as perceived by me, do not make sense from a business point of view.  “[They] own Mobipocket,” he wrote. “Eating into their own store isn’t something anybody would do, nor spend dev time on.”

Still, I see Amazon doing as much as possible to shut competitors’ e-books out of its device, and even out of devices it has some influence over such as the iPhone. And it is trying to make its device irresistible to the e-book-buying populace with loss-leader pricing. From the point of view of a business that wants all the marbles—and has huge amounts of money to throw at making that happen—it makes perfect business sense.

I’m not saying Amazon shouldn’t try it—after all, capitalism is one of the principles this nation was founded on. More power to them. But by the same token, everyone else should see what Amazon is doing so they can try to counter it.

In a conversation with ArachneJericho right now, he said, “What I wish for most is for publishers to take a look beyond what Amazon is doing and do something smart. […] Come up with strategies. If you only chase Amazon you will go nowhere. I kinda ran out of pity a while ago.”

I can certainly agree with him there. I hope publishers will come up with effective strategies, because it would not be good for the market to be dominated by any single player no matter who it is.