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The only thing worse for an industry than a price war is a cost war, and that is just what Amazon.com (Nasdaq: AMZN ) is doing by revising its royalties to authors of digital books available through Kindle.
The leading online retailer is offering a 70% royalty option on e-books, double the 35% rate that has held firm since the Kindle's launch in the fall of 2007.
Why is the doubling of the commission schedule not automatic? Why make authors and publishers opt-in to the new rates? Well, Amazon has several conditions tied to the higher payout rate.
- The content creators will have to foot the delivery costs. This is not a deal breaker, since the median tab on a digital book being sent out is a mere $0.06 apiece.
- The list price must be between $2.99 and $9.99. Most books fall into this range anyway, but it's going to keep prices honest when a publisher can make more off a $9.99 e-book than an $18.99 e-book.
- Amazon's price must be 20% below the list price of the physical version. Here is where things start to get interesting, as Amazon begins to make sure that it's offering Kindle owners a more attractive value proposition than buying the actual books.
- Kindle books under the 70% royalty umbrella will have to include a growing set of reader-friendly features, including the text-to-speech option that some publishers balked on, fearing that they will lose out on audiobook sales.
- Books on the higher commission schedules cannot be offered at lower price points elsewhere. Amazon will automate the process, so it can adjust to any changes through Sony (NYSE: SNE ) , Barnes & Noble (NYSE: BKS ) , and eventually Apple (Nasdaq: AAPL ) .
Ah, yes -- Apple. This is really ultimately just a preemptive strike against Apple. Everyone knows that the tablet computer is coming. Reports surfaced this week that Apple is already in talks with News Corp's (Nasdaq: NWS-A ) (Nasdaq: NWS ) HarperCollins to carry its books in digital form.
Amazon hasn't really been challenged by potential Kindle killers in the past, but Apple is a different critter altogether when it begins cranking up the hype machine. The "iTablet" will likely cost a lot more than the entry-level $259 Kindle, but it will also likely do a lot more. Anything that Amazon can do to disrupt Apple's game plan -- especially as it raises expectations for what publishers can get in digital deals -- may sting in the near-term, but will hopefully pay off in the long run.