I actually just posted this on my blog about the writing business, but I realized that it was an interesting question of economic dynamics of e-books and the Kindle, so thought I'd post it here as well without using a link back.

Tim O'Reilly is a smart book publisher, and he took a look at some of the numbers that e-book enthusiasts tossed around with the advent of Amazon's Kindle. His argument is that even if prices do tumble for e-books, it will likely be only temporary. It's worth the read.I'll add an additional angle. Let's assume that he's wrong and prices do drop and stay at $5 a title. What publisher and author combination can make money that way? Reading hasn't reduced in volume because the prices are too high - books just aren't that expensive.

If you have a current business model under which most titles don't even make back the pitiful advances that authors get, and where the cost of the actual paper is only about $1.50 a copy, then dropping the price by 60 to 80 percent is going to mean that publishers won't be able to afford to print anything that isn't going to be wildly successful.Current backlists may stay around (if the publishers have acquired the necessary rights), but forget the variety of titles coming out now. You'll be down to a handful of authors who can generate the necessary sales.

Some individual authors might be able to self publish, but if they're getting 35 percent of $5, that's $1.75. Take out costs of design and production, and maybe they're at $1 a book if they're lucky, which is the inadequate stream of money they made from publishers - too low to support self-publishing. So $5a copy, if really gutting the paper model, would actually leave book publishing virtually dead. Then supply and demand will kick back in, because there are those massive infrastructures to feed, and prices will head back up anyway.