Who Made the E-book Mess and What Happens Next?

The drama of the e-book pricing story has been heightened by the fame of its protagonists. But while Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) do seem to be pitted on opposite sides of the argument upon which the U.S. Justice Department’s lawsuit rests, the real plotter is probably the third party — the publishers. Their shortsighted view of their own industry may be the real culprit here.

E-book price cuts, of the kind Amazon sought and Apple killed, may seem like a bad idea for publishers, but a closer look finds that profits from the hike in sales volume (because of the lower price) can actually tip the scale over profits earned from margin-per-copy. In short, a fallback to the Amazon pricing structure of old may be good for both the publishing industry and the consumer.

First, a little background: Apple and five big publishers were sued by the DOJ last week for allegedly colluding on fixing e-book prices. While three — Simon & Schuster (NYSE:CBS), Hachette, and HarperCollins (NASDAQ:NWSA) — have already settled with the government, Penguin (NYSE:PSO) and Macmillan will argue their case along with Apple. The California company’s main line of defense is that its actions ended Amazon’s monopoly on the e-book market, increased competition, and helped consumers in the long run.

However, both Apple and Amazon only ever got into the e-book fight because they wanted to make the cheapest content available on their respective e-reader. Ultimately, the real reason for either is to ensure a bigger market share for its own device and earn profit margins from hardware sales instead. In fact, in the last quarter of 2011, Apple’s $2 billion in revenue from Internet services — of which e-books are an even smaller fraction — formed only 4 percent of the company’s total sales.

When Amazon launched the Kindle reader in 2007, it immediately slashed e-book prices because it could afford to take losses there, and saw sales of the device race up. However, publishers believed Amazon was bullying them for its own profit, and cheered Apple’s change in pricing structure. Apple let publishers set their own prices on the iBookstore as long as it was given the most-favored status, meaning it received the lowest price they were offering another retailer.

However, the publishers simply acted shortsightedly, believing profits had to depend on margin-per-copy for e-books just as they do for physical books. In fact, profits on sales of e-books, which don’t have the same overhead costs of physical books, make more sense when overall volume is taken into account. After all, publishers only have to spend on an e-book once, unlike the repeated printing and shipping costs of a paperback or hardcover.

The three publishers who settled will have to dissolve their contracts — including the most-favored clause — within seven days of the end of a 60-day comment period. That means that retailers, including Amazon and Barnes & Noble (NYSE:BKS), can soon set or change their own prices, and will again be allowed to offer discounts and promotions such as bundles and subscriptions.

The settlements will drive volume sales over profit-per-copy, and may end up being a winning situation for publishers, authors, and readers.

“It’s not like [publishers are] trying to fight to maintain some kind of traditional standard for its own sake,” Paul Levinson, a professor of communication and media studies at Fordham University, told Mashable. “I think prices will be lowered, but publishers may make more money. They’ll stop printing books and they’ll sell more of them. It’s a lot easier to distribute to a million people on Kindle than in bookstores.”

Could that mean a happy ending for everyone?