This morning on Mediabistro’s online radio show “Morning Menu,” host Jason Boog talked about the Amazon/Macmillan battle in this interview with Andrew Savikas the vice president of O’Reilly Media. O’Reilly is one of the most forward thinking publishing companies in the digital realm and they hold the annual “Tools of Change” conference, coming up later this month. With all this talk about pricing coming from all sides, Savikas brought the discussion into a much clearer and much more business-oriented perspective, instead of bandying about numbers (or in the case of Amazon, not revealing concrete numbers at all). He talked about price, pure and simple, and the data that determines it, not the whims of book executives and e-tailers. Two of the points the Savikas made seem particularly relevant to me at this moment as the publishing world hammers out its e-book/e-tailer relationships.

1) “Fair price is what someone is willing to pay.” Amazon has been arguing all along that their reason behind dropping prices to $9.99 is that it is most “fair” for their customers. But in reality, this isn’t Amazon’s motivation (and they are using “fair” in a far too subjective fashion). $12.99 might also be a fair price for Amazon customers. We would know this if Amazon allowed publishers to experiment with this pricing and collect data on consumer behavior. Instead, Amazon’s goal is to set a price that will allow them to dominate the e-book market with their e-reader (the Kindle) and their e-format. Amazon needs to join the pricing conversation in an honest way. Because whatever is decided now, price-wise, will effect their business in the long-term, just as the price of print books and their discounts were once hammered out. Amazon is an integral part of the book industry and they need to learn to work in partnership with the companies that supply them their product. In the end, consumers will decide the price, and companies (including Amazon) need to offer resistance in order to truly determine what a reader is willing to pay for an e-book. It might be a lot higher than we think, but the industry needs to be prepared for anything.

Which leads me to Savikas’ next point :

2) It is a mistake to do cost-driven pricing instead of price-driven costing. Savikas is a fan of Peter Drucker, the late business management consultant and “social ecologist.” Savikas’ point here is that because the market (readers) will set the price, publishers will need to be prepared to produce the product (books) profitably, because their competitors will price their products in response to market behavior. This is why determining the price of e-books has become so important for publishers: most of them understand that they will then have to work within that set price range, just like the music industry (however miserably) had to conform to iTunes pricing once $0.99 was established as fair price for a song. So John Sargent and Macmillan are trying to establish fair price for the industry before $9.99 is set in the public mind. Even though they know that they will not have the final say in what a customer will pay for an e-book, they can help determine how high the floor is by not giving their leverage away all at once.

There was good news coming from Savikas’ interview however. Its not all doom and gloom. O’Reilly has had great success selling e-book versions of their titles on their website at 80& of the print price. Why is this? Savikas and O’Reilly have come to the conclusion that the elasticity of demand for e-books is significantly smaller than that of other digital media, such as iPhone apps. According to their research, buyers of e-books are less price sensitive (as opposed to apps, where in one case the doubling of price from $5 to $10 diminished sales by 75%). No drastic sales drop has been seen like that in e-books. Which is a good sign that $9.99 is not the highest “fair price” that customers will be willing to pay, further legitimizing Macmillan’s argument against Amazon.