1. I agree with Tim O'Reilly that publishers are missing an opportunity to create a bigger multimedia experience around each book. This is made especially easy now with the iPad -- just create an app for each book that connects to interviews with the author and additional rich content (O'Reilly is already doing this). Anyone who plunks down $20 for a book (even $9.99 for a digital version) is probably interested enough to value the additional material. Since Americans supposedly read less and less, eventually the multimedia content will become the most accessed part of the package.
2. The file size for the text of a book is tiny (i.e., comparable to a song file), so piracy will be an issue. Any DRM system is eventually going to be broken, and we'll see huge online repositories of books in PDF or other open format. I think this is going to drive prices down to a "convenience equilibrium" (where the price more or less equals the value of the effort required to find a pirated version), analogous to the 99 cents per song on iTunes. The bare-bones text version of a book (as opposed to the rich multimedia version) will probably end up at a pretty low price point, regardless of what publishers and authors want.
To get a better feel for the digital future of books, play with an iPad for a few hours. The experience is so pleasing, the app response times so quick, that you'll begin to imagine just how rich and integrated (text, sound, video) the consumption of media is likely to become. This isn't something you'll get from using a Kindle.
New Yorker: ... Traditionally, publishers have sold books to stores, with the wholesale price for hardcovers set at fifty per cent of the cover price. Authors are paid royalties at a rate of about fifteen per cent of the cover price. A simplified version of a publisher’s costs might run as follows. On a new, twenty-six-dollar hardcover, the publisher typically receives thirteen dollars. Authors are paid royalties at a rate of about fifteen per cent of the cover price; this accounts for $3.90. Perhaps $1.80 goes to the costs of paper, printing, and binding, a dollar to marketing, and $1.70 to distribution. The remaining $4.60 must pay for rent, editors, a sales force, and any write-offs of unearned author advances. Bookstores return about thirty-five per cent of the hardcovers they buy, and publishers write off the cost of producing those books. Profit margins are slim.
Though this situation is less than ideal, it has persisted, more or less unchanged, for decades. E-books called the whole system into question. If there was no physical book, what would determine the price? Most publishers agreed, with some uncertainty, to give authors a royalty of twenty-five per cent, and began a long series of negotiations with Amazon over pricing. For months before Sargent’s visit, the publishers had talked about imposing an “agency model” for e-books. Under such a model, the publisher would be considered the seller, and an online vender like Amazon would act as an “agent,” in exchange for a thirty-per-cent fee.
... Madeline McIntosh, who is Random House’s president for sales, operations, and digital, has worked for both Amazon and book publishers, and finds the two strikingly different. “I think we, as an industry, do a lot of talking,” she said of publishers. “We expect to have open dialogue. It’s a culture of lunches. Amazon doesn’t play in that culture.” It has “an incredible discipline of answering questions by looking at the math, looking at the numbers, looking at the data. . . . That’s a pretty big culture clash with the word-and-persuasion-driven lunch culture ...