Reference no: EM131285645

What's your favorite way to read books? Do you prefer hard or soft covers? Do you prefer reading physical books or reading books on the Internet? Recently one more option has been added to the decision process: the e-book reader. As the print industry declines, the e-book reader may exert a dramatic impact on book, magazine, and newspaper pricing. Amazon.com jumped into this market with the the Kindle, which consists of a hardware and software device that displays content from various e-books and other digital media. It can access content through downloads using the Sprint EVDO network. Free access to the Internet via cellular networks is available at no cost to the consumer.

The goal of Amazon is to change the way people enjoy media content. Amazon offers over 540,000 titles for the Kindle, containing the largest selection of the books available for reading devices, including U.S. and international newspapers, magazines, and blogs. New York Times best sellers and new releases sell for $9.99, most daily newspapers are available for $5 to $10 per month, and magazines are approximately $1.50 per month. The Kindle store offers thousands of free popular classics including titles such as The Adventures of Sherlock Holmes, Pride and Prejudice, and Treasure Island.

In addition, customers can download over 1.8 million free, pre-1923, out-of-copyright titles from other Web sites. In 2010, Macmillan, a group of publishing companies in the United States, requested that Amazon increase the price of its book selections from $9.99 to around $15.

Amazon, in response to the request for new pricing, temporarily removed Macmillan books from the Kindle store. Macmillan proposed using an agency model in which the publisher sets the retail price and collects 70 percent of the sale. Amazon would receive the remaining 30 percent of the proceeds. If Amazon did not agree to the proposal, Macmillan would offer Amazon the opportunity to purchase e-books using the current wholesale model and pay 50 percent of the hardcover list price. Amazon would be free to set the retail price at any level;

however, Macmillan would only allow access to the e-book version seven months after the hardcover release. Another key player in the e-book pricing environment is Apple. Apple offers publishers the chance to sell their content through its new iBooks store. All publishers who choose the iBooks store to distribute their content have the ability to set the retail price. Apple would also collect 30 percent of the retail price using the agency model. This agency model used by Apple gives publishers more control in pricing. Typically, the prices for newly released e-book editions are $12.99 to $14.99. At the time, many other publishers nervously watched from the sidelines as Amazon and Apple offered competing pricing strategies.

At the turn of the early 21st century the print industry was well into a steep decline. Consumers were moving their consumption from print materials to electronic materials. This environmental change could have a dramatic impact on print pricing. Amazon's introduction of the Kindle is a response to the new market dynamics. Amazon's insistence of a $9.99 price point was an attempt to offer a flat, easy-to-understand rate to help build a new market. However, the correct retail price, along with its impact on publisher pricing, has yet to be determined for the long run. How much power do publishers have over the retailers? What pricing strategy should Amazon adopt for the long-term success of the Kindle and e-books? You Make the Call

1. What is the decision facing Amazon?

2. What factors are important in understanding this decision situation?

3. What are the alternatives?

4. What decision(s) do you recommend?

5. What are some ways to implement your recommendation?