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.

Game developers have frequently lamented the drive for lower cost games on the iPhone.  “The push to 99 cents is the single most frustrating and terrible thing about App Store pricing,” says Nathan Vella, co-founder of Capybara, makers of Critter Crunch. “Since it became ‘expected’ by consumers, it forces a lot of developers, specifically indies, to devalue their game and significantly increase the number of sales needed for developers to get back their investment.”

But what Vella thinks as devaluing is really basic economics. Competition, the healthy and rewarding heart of capitalism, encourages makers of goods to try to one-up each other, whether by lowering prices or offering a more compelling product.

The App Store, with more than 100,000 applications, 13,000 of which are games, competition is pretty fierce. It is to be expected that price will be pushed down. Most game makers have stayed around 99 cents, so if someone really wanted to stand out, maybe they should sell at 98 cents. Or there’s lots of free games and that soon might become “expected”. Not even including truly free apps, estimates (which I strongly question) claim 75 percent of apps are pirated meaning Vella and game developers have more to fear from free than 99 cents. If Vella thinks 99 cents devalues his games, how will he feel when he’s forced to sell it for free?

iPhone developers, like many in the media industry, forget that price and value are two different things. Value is subjective. I, as a consumer, value a game a $10. As long as the price is less than $10, I will buy the game, even if it is $2. The developer chooses the price that will make them the most money, specifically by setting the price low enough as to attract the largest number of buyers. The $2 price in no way devalues the game. While I might have paid more, 10 other people might not have. Meaning the developer attracted more purchases and made more money over all. This is known as price elasticity.

We see evidence of this in many digital services. The PC game Left4Dead took 50 percent off its price and jumped 3,000 percent in sales. Variable pricing on iTunes led to lots of $1.29 songs and very few 69 cent songs. Those higher priced songs have seen enough of a drop in unit sales that overall revenue is lower. Maybe at 69 cents, they’d actually make more money.

For game developers, it seems the App Store just has too much competition to make it easy for anyone. There are so many games vying for attention, thanks to the low cost of entry (until traditional gaming consoles), that its a major challenge to get the attention of enough consumers willing to pay the 99 cents (or even pirate it). The benefits of the Long Tail in the App Store necessitates better search and organization to help people find the apps they want (the App Store does lack this robust a function). But game developers can look for their own solutions to stand out by using social media, pricing, and excellent games to build the buzz. It’s not Apple’s fault, it’s not consumers fault, piracy’s fault, or other developers faults. It is up to each developer to give consumers a reason to buy their game.  If consumers don’t pay, then change what you’re doing. That’s innovation and competition makes sure it happens.

I love having all my media in one place: on my iPod, media center, or gaming console. Disc switching is so 2004. And slowly entertainment companies are getting it – we want digital downloads of our movies, games, and music. But they don’t understand how we want them priced.

I’m going to skip, for this article, the true economics of digital goods (they’re infinite in supply, they should be free). Instead, let’s start with making them cheaper than their tangible alternatives. Why? There’s a win-win situation here.

First, digital goods save the creator money. The is no packaging, processing, stocking, or shipping. A little hard drive and some bandwidth are all you need. This should all cut substantial costs out of the creator’s bottom line, and that’s savings worth passing along to the customer.

Consumers, while adding the convenience of fewer discs and more content, lack the ability to resell their digital goods, which research shows increases the initial value of tangible goods (you spend more on a car knowing you can resell it for some money, and the same applies to video games and DVDs).

So why are digital goods still priced so high (and by high, I mean, the same price as their tangible counterparts)?

Part of the reason is retail chains are eager to keep customers coming into stores and want DVDs and video games as weekly incentives. Creators might want this traffic for impulse (or non-technical savvy) purchases, but in truth, they are the losers in this arrangement. Creators fight for shelf space often paying premium dollars for ideal placement when digital stores allow for better navigation and unlimited shelf space.

Yes I believe digital goods will eventually all be free (it’s inevitable) and new business models will support their creation. For now, let’s just make the prices fair. Remember, BitTorrent has all this content available for free anyway.