Amazon has been selling eBooks at a loss in order to increase sales of the Kindle.  Amazon would buy the eBooks whole from publishers at about $12 and then sell the eBooks for $9.99.  But book publishers, who have been used to more than a decade of high profit hard covers, view these eBooks as a threat to their business rather than an opportunity (seeing a pattern here recording industry?).

Macmillan demanded Amazon change its pricing, focusing on more expensive $12.99-$14.99 charges for new books. Because of Macmillan’s demands, Amazon removed all digital and hard copy versions of Macmillan’s books.  The books and digital versions have since returned with the Amazon agreeing to taking a 30 percent commission from eBook sales rather than buying them wholesale. The result means Amazon will actually make money now on eBook sales and ironically, book publishers make less (30 percent of $15 is still less than the old wholesale price of $12.99-$14.99).

You have to wonder whether Macmillian and book publishers have paid any attention to the past 10 years, watching the recording industry shrivel up as it fought tooth and law brief against digital media (and still hasn’t given up on its road to irrelevance).  First, my belief is that book publishers know increasing eBook prices will hurt sales. This is made apparent by several publishers’ urging to delay eBook releases for weeks after the hard cover. Much like movie companies delaying Netflix rentals a month after the DVD is released, book publishers don’t want to siphon readers away from their high margin hard cover books.

Of course, this only annoys customers. If customers want the eBook but one is not available, there are more than enough unauthorized versions on file-sharing networks on the day of release. You can’t compete with free by staying home and sulking.

But then book publishers want to charge higher prices. Well, let’s see how well that done for the recording industry on iTunes. iTunes allowed higher and lower prices on music beginning last year and the results have shown such a large drop in unit sales that overall revenue is down.  Growth in digital sales slowed from 20 percent in 2008 to 8 percent in 2009. While yes there was still growth, that is a massive drop in a still infant industry. The price elasticity of digital goods is extremely sensitive to increases in prices (and seems even more sensitive to drops, as video game download service Steam has successfully proven with its sales).

As I and others will say over and over again, digital goods are infinite goods. Basic economics says their price should be zero. And there are several examples of free eBooks actually increasing the sales of the actual book. But economics and real-life examples don’t matter when you have a former monopoly on distribution to protect. But business evolves and like the recording industry, book publishers may be in for a difficult decade.

While today’s book publishers, movie makers, and music producers claim the entire creative industry would end without copyright, history proves the opposite. The first copyright statue was introduced in 1710 in Great Britain, several thousand years after the invention of the written word, and almost a full century after Shakespeare produced some of the most influential creative works in history.

Shakespeare wrote 38 plays, 154 sonnets, and several other poems, made a substantial living, and is still widely read, performed, and praised without any copyright protection. Even in the age of copyright, Shakespeare has made more than 420 films, making him the most filed author in any language. This year alone, more than 1,200 editions of Shakespeare’s works have been published, 445 within the last 90 days (according to Amazon).

How, if copyright is so vital to the creation of creative works, did Shakespeare accomplish what he did? And if copyright is even more important now, than why do filmmakers and publishers still reproduce Shakespeare’s works?

Shakespeare, as a genre and even industry unto himself, shows how copyright adds little to no incentive to creating new works, but rather can be seen as an impediment to such creation.

First, let us remember the time Shakespeare wrote in. In the 16th century, writers were valued for their language and style rather than originality. In fact, originality for storytelling is a modern value.  Almost everyone of Shakespeare’s plays was obviously copied from another creative work or historical subject. Groklaw counted more than half a dozen cribbed sources in King Lear that when looked at with modern copyright would have cost the Bard hundreds of thousands of dollars in fines and possibly criminal prosecution. Yet we praise King Lear as a masterpiece, not as an illegal piece of piracy.

Shakespeare made glorious new works by copying other works, both past and present, something he could easily do without copyright. Today, he would need permission from each and every source – permission he might not even get.

Today, we still praise new works that are purposefully based on Shakespeare’s plays, yet innovate in some new way.  West Side Story (Romeo and Juliet), Lion King (Hamlet), Kiss Me Kate (Taming of the Shrew), and Forbidden Planet (Tempest) for example. Or Rosencrantz & Guildenstern are Dead which uses  side characters from Hamlet to tell a new story within Hamlet itself.

Because all of Shakespeare’s plays are in the public domain, a massive amount of creativity can happen building on what Shakespeare. Shakespeare productions and publications compete with each other, encouraging more creativity, whether in casting, interpretation, or other radical approaches. That’s why you can see a musical Romeo & Juliet, a full-text, four hour Hamlet, and a female (Helen Mirren) Prospero (known as Prospera) in this year’s Tempest.

You might think Shakespeare is an anomaly, someone who transcends copyright. That, of course, ignores that Shakespeare’s contemporaries, many of whom were more famous at the time, also wrote without the benefit of copyright (since copyright wasn’t to be invented for another 100 years). And Shakespeare isn’t the only author Hollywood and publishing loves to reproduce. There’s Hans Christian Anderson, the Brothers Grimm, Homer, Charles Dickens, Jane Austen, Mark Twain, and all of mythology and the Bible to name a few.

The Guardian posts an interesting theory that for Amazon’s Kindle to be more successful, it needs more widespread piracy.  Unlike Apple’s iPod, Kindle users can’t transfer their book collections onto the hardware like CD-to-MP3s.  Every book must be purchased or downloaded. And while book piracy does exist, it relies on devoted fans copying every page – not as easy as an automated CD ripper.

The Kindle is selling quite well for Amazon, but hardly on the road to travel dominance like the iPod. This might show the market is not as ready for the iPod of books as it is for the iPod of music.  As I’ve (and others) have written, piracy shows what the market wants and at this point, digital books are not in high demand.

Book and content producers need to understand why this is the case. Right now, books are more valuable to consumers for any variety of reasons, like convenience, habit, and collecting.  We know reading online/on the computer is a preference for many for short features, like news articles, but books are still preferred in tangible form.  The Kindle isn’t going to change the habits of consumers, but it’s a forward looking option that knows paper’s days are numbered.

Unfortunately, the book industry is leaving clues they are more likely to follow the close-minded music industry approach.  Paul Aiken, the executive director of the Author’s Guild claimed the Kindle’s new text-to-speech feature was an act of copyright infringement by allowing any book to be read aloud saying literally: “They don’t have the right to read a book out loud…That’s an audio right, which is derivative under copyright law”. According to his logic, reading any book out loud, even a bedtime story for your kids, is a derivative work and thus copyright infringement.  Or, maybe, this feature is just a way to make the Kindle, and thus digital downloads, more valuable to consumers. It’s unlikely a computerized voice is going to replace emotional actors on audio tapes.

For book publishers, they need to plan for a future where books are digital and readily pirated. It’s already happening on a very small scale.  Instead of fighting the inevitable future, book publishers can embrace the change and profit from it. First, embrace the cheap distribution of digital goods and include digital downloads of books with the purchase of a hard copy. Even spread full, free downloads online – several examples of free eBooks show huge increases in tangible book sales.  These sales come because the hard copy is more valuable than the digital copy.  Book publishers need to increase the quality of the published books, recognizing why people buy them.  Small, soft cover travel copies are perfect for convenience customers (and should be cheap, impulse buys). For collectors, like everyone I know with huge bookshelves to fill, increase the value of hard covers with gorgeous art, author’s notes (the paper form of commentary tracks), and high-end binding.

These features give customers a reason to buy the hard copy.  This way, when book piracy explodes, book publishers are already offering compelling alternatives that give customers a reason to spend their money.

Last week Google announced a $125 million settlement with book publishers to allow the search engine to copy out of print books and make snippets available with options to buy. The settlement avoids a lawsuit brought by the Author’s Guild and Association of American Publishers.

While many are praising the decision, I’m hesitant for several reasons. While it’s excellent to make thousands of out-of-print books available for research, the many restrictions, cost questions, and lack of legal precedent make this a lost opportunity for so much more.

Harvard University criticized the program for these reasons, going to far as to back out of the deal already in place before the settlement.  The university pointed out libraries, who would pay an unspecified price for full access, would be restricted to one terminal with access to the books and many copies would be missing pictures. Downloading would still not be allowed.

Second, Michael Masnick points out Google had previously stated it wanted these lawsuits to make better laws, using its massive war chest to fight lawsuits others couldn’t afford to. By paying off book publishers, Google not only lets go of an opportunity to stand up for fair use, but also opens itself up to other companies looking for an easy pay off. Viacom, in the middle of a $1 billion lawsuit with Google, used this settlement to claim Google learn its lesson in relation to honoring copyrights. Google’s made similar concessions, like paying off the Associated Press just to link to its stories, leading other news organizations to want their cut.

I’ve already found the limitations of Google Book Search reasons not to use it. Google is certainly trying to make the search mroe valuable for users, using an opt-out program to make sure orphan works can be accessed so this is better than nothing. But once again, book publishers are ignoring the value Google is adding to their books, books that are out-of-print and wouldn’t find an audience without Google’s scanning and searching.  Google is adding value publishers should want and be seeking out. But because of these restrictions (and cost), fewer people will be able to find these books and thus fewer people will be likely to pay.