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updated 10/20/2009 1:52:02 PM ET 2009-10-20T17:52:02

Publishers have been battling Amazon over the price of e-books, only to get outflanked by Wal-Mart last week on the bread-and-butter best-sellers. In an effort to boost traffic on Wal-Mart.com, the Bentonville, Ark., retailer is offering select hardcovers that are among the most anticipated of the season for $8.99. Who saw that coming?

Not the publishing world. Book people are easily spooked. And their first line of defense is to hyperventilate. That’s what literary agent David Gernert did in the New York Times when he claimed, “Publishing as we know it is over ” if readers come to expect hardcover best-sellers for $9 at Wal-Mart, Amazon, and Target (which matched the offer) He feared the low price would turn readers off to literary books at $25: “I think we underestimate the effect to which extremely discounted best-sellers take the consumer’s attention away from emerging writers.” But instead of fretting over first novels, publishers and agents should latch on to this development as a way to restructure the economics of the industry to everyone’s benefit.

In truth, there are no barriers to success in the book business. Publishing is ruthlessly efficient. Books that excite readers take off; those that don’t disappear fast. There’s no evidence that John Grisham crowds out the great American novel. In fact, it’s quite the reverse. What the industry lacks are products that excite readers. Where publishing is brutally inefficient is the process by which it selects products and allocates resources. And those toxic assets — all the unearned advances — are paid off by the best-selling authors. Stephen King, John Grisham, and the Freakonomics guys cover the cost of failed books.

So fighting the low-priced book — either electronic or hardcover — is a red herring. Consumers are already accustomed to paying varying prices for different editions of the same title. Many a book sells well in the higher-priced trade paperback form even when a cheaper mass market edition is available. The same is true for hardcovers, in many cases. More to the point, Costco trained customers to expect to pay half the cover price on hardcovers and paperbacks many years ago. The impact on independent bookstores — the entities that supposedly support and nurture emerging writers — and chains has been profound but is hardly new.

Wal-Mart’s loss-leader campaign only emulates what Amazon and Costco have already done: Use cheap books as a signal of value. It has seen how successful books can be for customer loyalty, especially among women, who compose the majority of shoppers and readers. The discounts will be very hard for Wal-Mart, Target, and Amazon to sustain because they must purchase the book from publishers for more than they charge customers. But watch out. Like Amazon’s 40 percent discount on best-sellers and the 50 percent discount by other physical retailers, the overall trend in the book business has been toward price deflation. Wal-Mart can keep the cuts up if it arranges a deal that allows the publisher to sell books to the giant on more favorable terms. So, once again, it is the very success of books — a medium no one supposedly cares about any longer — that continues to erode the economics of the publishing industry.

The combination of slow sales and squeezed margins is enough to make any publishing executive queasy. Perseus CEO David Steinberger explained it to the Wall Street Journal : "If you are taking margin out of the supply chain, it will eventually put pressure on everyone in that chain." Publishers are afraid that if Wal-Mart, Amazon, and Target can make that $9 price stick, they’ll be forced to lower their wholesale prices. They don’t think the big writers will take less money up front. So they’re freaking out that the lower price point will come out of their profit margin. Publishers need that margin to pay off all the overpriced advances that lie like a dead hand on publishers’ profits.

But there’s hope in this madness. The $9 best-seller is the game-changer publishers need to rejigger their relationships with their biggest authors. Ted Kennedy’s publisher may not lose money on his $8 million book , but they’re not going to make any, either. Instead of competing for Kennedy or Palin or any of a host of other celebrity books by bidding up the advance, publishers could use the squeezed margins to do a Dutch auction on a distribution fee.

Publishers shouldn’t be risking their capital on authors who bring their own audience to the equation. These are the authors who will want Wal-Mart, Amazon, and Target selling their books for $9. All the book company does for them is provide distribution, so the publisher should reverse the formula. If the publisher is going to sell the book to Amazon for $9, they should offer to take $3 per book as distribution and marketing fee. A fat hardcover book costs $2 in paper, printing, and binding. The author would keep $4, which is basically what he or she would earn in royalties on a $27.95 book. But since this is a competitive situation, the publisher might bid lower — say, $2 per book and a pass-through on the marketing costs.

If the book succeeds, the author makes a boatload of money: $5 million on a million copies sold. If it fails, the publisher isn’t crushed by the unearned advance. The more copies the publisher sells, the more the company makes. Everyone’s interests are aligned. If publishers want to get really slick, they can create sliding-scale distribution fees that reward the author with a greater share as the book gets bigger. Thus, they would pay the authors who really deliver the most, instead of the authors who bedazzle them the most in a meeting.

Will publishers have to drastically cut their overhead with this model? Yes, but they’re going to do that anyway. It’s been another bad year in the book business, and we’re likely to see another round of big cuts this Christmas. Do I think publishers will embrace this new business model? No. They’re too greedy. Like bankers, they would rather increase their risk-chasing margin than decrease their risks by reducing their costs. But the funny thing here is that the same supply-chain forces that have them posturing as the defenders of emerging writers have also provided a much better — and more cost-effective — way for them to develop new talent. And that would be those $9.99 e-books they were so worried about until last week.

Copyright Washington Post.Newsweek Interactive

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