You could see this one coming.
Amazon is launching a new "70% royalty option" for the Kindle.
Under this option, Amazon will pay authors and publishers a royalty of 70% of the list price of Kindle books, which is a far higher per-copy royalty than most authors receive on physical-book sales (including the standard Kindle book royalties).
This new plan will encourage more authors to "go direct" to Amazon (or at least force their publishers to sell e-books at a substantial discount). This, in turn, will increase the pressure on traditional publishers to cut prices on wholesale Kindle books. And that, in turn, will transform the Kindle business from a big money-loser into a very profitable business for Amazon.
The new royalty plan comes with some strings attached, all of which are designed to further Amazon's goals here:
This looks like a brilliant play from Amazon. E-book prices need to (and should) drop substantially: When the cost of an incremental sale is near zero, publishers have no business charging physical-book prices.
The traditional publishing industry moans that cuts in e-book prices will wipe out what little margin the publishers have left, thus preventing publishers from paying authors big advances and, thus (be afraid! be afraid) result in fewer good books being published.
As e-book prices drop, unit velocity will increase. If Andrew Ross Sorkin's "Too Big to Fail" were priced at, say, $3.99, Sorkin would sell hundreds of thousands more copies than he will at today's prices ($29.99?). If Sorkin gets 70% of the sales price as a royalty instead of the paltry 10% he might get now, he'll do fine. He might even have enough left over to pay a publisher a nice fee to package and market the book for him.
This is where the book industry is headed, whether traditional publishers want it to or not. Amazon's new plan should help shorten the time it takes to get there. The plan should also solidify Amazon's already tremendous dominance of the e-book business, of which Kindle has an estimated 90% unit share.
For more of Henry Blodget's analysis of digital media, check out Business Insider.