There's a lot of hooplah going on at the moment about Amazon and Macmillian. The digest version is:

1. Amazon said "we'll match Apple's profit-cut for e-books if you agree to price books between 2.99 and 9.99, and not offer a cheaper one anywhere else."
2. Macmillian said "9.99 is below what we sell them to anyone for, and will harm the brick-and-mortar industry, and the publishing industry in general in the long run. You can either allow us to price books from 12.99 to 14.99, or we'll just release the e-books after the hardback sales have finished, so as not to undermine the printed books."
3. Amazon said "nuh-uh!"
4. Macmillian said "Them's your options, pick one."
5. Amazon said "If you won't play by our rules, we won't sell ANY of your books! So there!"
6. Macmillian said ".... that's the stupidest thing I ever heard. What use is a bookseller that only sells 5/6ths of the books? People will just buy our books elsewhere. PS: you're not actually a monopoly."
7. Amazon said ".... um... oh yeah. Okay, you can sell at 14.99, because you're a big mean bully who's hurting the publishing industry with unsustainable expensive prices."

The big questions here are - what should be the price of an e-book, and how will the publishing industry have to change to manage that?

Amazon's 9.99 price point is below the price the publisher charges per copy - they're losing money on almost every e-book sold at that price. They're not doing this out of faulty accounting - it's what's called a loss leader - a cheap product design to entice customers to buy another, more expensive (and harder to sell) product. The main issue authors, editors and random internet people have with Amazon's pricing structure is that if it continues on long enough, it can potentially change the perceived value of a book.

It's only worth what someone will pay for it

The cost of something isn't a fixed number - things are only worth what people believe they are worth. The classic example is diamonds - they're actually far more common than emeralds and rubies, but they're priced higher because a certain company spent a great deal of money on careful marketing to make people believe they were worth more. If people believed they were rare and special, the company could artificially limit supply and charge far more than open supply-demand would permit. If someone got their hands on one of the storehouses and started flooding the market with cut price, genuine top-grade diamonds, the price would drop dramatically. As people became accustomed to that price, the perceived value of the diamond would also fall - they would be worth less, because people believed they were worth less.

Substitute books for diamonds, and it's the same story. The longer Amazon keeps selling e-books at 9.99, the more the public will believe e-books are worth 9.99, regardless of the actual cost of producing them.

E-books aren't free to produce

There's this myth that the majority of the cost of the book is the paper and printing. Which is nonsense. If I dig out the costings I've done for books, print costs represent only 10-15% of the RRP of a book. Which means that, if we take the average Australian paperback price of $22.95, the e-book edition is only $3.50 cheaper at best to produce.

How can this be? Surely if you're not paying anything for the physical production of the book, the costs should be next to nothing, right?

What this argument forgets is the labour involved with producing a book. Someone had to write it, and then shop it around and convince an editor to buy it. That editor than had to convince her publisher to buy it. Then someone had to edit the structure, and then each individual sentence and word. Someone else had to check for typos, design the font style and page layout, the cover art, any interior art or text decoration, make sure it was typeset and formatted properly for the page size, arrange the marketing to the booksellers so they'll stock it, and to the public so they'll buy it. Each of those is a long, laborious, painstaking process, and where the real cost of the book lies.

Only one of those processes (marketing to booksellers - the cost of which is usually a publisher overhead, and not calculated per-book) can be skipped for an e-book. 

And yes - if the publisher is doing all this for the print version, then most of it (though not all) has been already-done for the electronic version. Surely we can just cover those costs in the printed version and sell the electronic one cheaper?

Sure - if you're willing to let publishers delay the electronic version so they do recoup their costs with the printed. Otherwise, the cheaper e-book will undercut the printed, people will buy the electronic over the printed, and the publisher won't cover their costs.

Which is exactly Macmillian's argument - let us sell it at a reasonable price, or we'll delay its release so we can recover the production costs from the printed version.

What are you willing to pay?

Everyone would rather their purchasing power went further. We like to get stuff cheap, because it means we can get more stuff. But if we're questioning what e-books are worth, how about we take a look at the games' industry argument for their prices - the entertainment hour

• A movie gives you two hours of entertainment for $20 (please don't snort your pepsi as you read our Australian price-gouges). That's $10 per hour entertained, with no accounting for actual level of entertainment.
• A game gives you 10 hours of entertainment for $110: $11 per entertainment hour. (on average. Obviously games differ in length far more than movies).
• An hour of glow-in-the-dark mini-golf cost me $12 last time I played; a DVD $30 (with about an hour of extras) - so far, it seems that $10 per entertainment-hour is fairly normal. Then we get to:
• A song gives you 3 minutes of entertainment for $2: $40 per entertainment hour.
• A book gives you six hours of entertainment for $22: $3.50 per hour entertained. (I'm making wild assumptions of people's reading rates and the average length book, but reading a book in two or three afternoons seems fair for most people).

So, by the standards of movies, games, DVDs and glow-in-the-dark mini-golf, music is massively overpriced (we should be paying $.50 per e-minute song) and books are horrendously overpriced - the average paperback should be $60. 

I'll admit, that seems a ludicrous figure - the only books I'll happily shell- out $60 for are textbooks or cooking / craft books with glorious colour photographs (oddly enough, I only get about 2 hours out of them - they should only be $20 - hah!) But this thinking is the result of the publishing industry confusing the value of the physical object with the value of the content.

Buying an experience

When you purchase some kind of entertainment - movie, music, book or mini-golf, you're not paying for the packaging that experience is delivered in - the paper, the DVD. That's part of the experience, sure - hence why there is a gut-level argument for digital products being cheaper - but the real experience is in the content of that package - the story, the game, the movie. Idiotic DRM aside (yes, I'm against DRM. It's impotent at preventing theft and automatically gives the pirates a better product), that doesn't change just because the packaging is digital.

 I'm well-aware that $60 for a paperback is improbable in the extreme. However, a shake-up of the industry pricing structure is already happening. With publishers shedding more and more of the production load back onto author's shoulders and POD / e-publishing threatening to render publishers obsolete as authors self-publish, the old production-costs are rapidly becoming outdated. Why shouldn't we opt for a pricing structure based on the entertainment hour?

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