Via the Times:

Amazon has been pushing publishers to sign a new round of legal agreements that would guarantee that the Kindle price for their content is always the same or lower than the price on other electronic reading devices, such as the iPad or the Sony Reader. The clause, a variation of a legal concept known as “most favored nation,” would guarantee that Amazon’s customers would always get the best price for electronic versions of magazines, newspapers and books.

If publishers accept Amazon’s contract, what impact does it have on prices of books purchased for the iPad or the Sony Reader?  In the existing regime, if Apple negotiates low prices for books, it can undercut Kindle prices for the same books.  This makes the iPad more attractive vs the Kindle and stimulates sales of the iPad and profits for Apple.  In the new regime (i.e. if publishers accept Amazon’s terms), Apple can no longer undercut Kindle book prices as any price cut they negotiate is automatically passed on to Kindle consumers.  Apple has less incentive to negotiate low prices with publishers and publishers have more incentive not to give in.  An eBook price war is less likely with Amazon’s policy and consumers are going to see less competition on this dimension not more.

Publishers are complaining that Kindle book prices are too low.  They are presumably worried that the Amazon deal is bad for them.  But I suggest it is actually good if current prices are really too low as they claim.  So they should sign it.

Is it good for Amazon?  Higher prices for eBooks will slow down adoption of eReaders.  But if prices of eBooks increase and their revenue sharing agreement is generous, there may be more revenue from sales of content. So the net effect depends on how much money Amazon will make off hardware versus the slice of revenue they’ll get from sales of content. And it’s not at all clear that this goes the right way for Amazon.  If it goes the wrong way, in a bid to sell more Kindles, the obvious strategy is to cut the price of hardware.   Then, the publishers will be even happier they signed the contract with Amazon!

This is one possible scenario.  With an industry and technology that is changing rapidly, there are many others.  Still, did Amazon think through all this?  It’s hard for an outsider to gauge.  Iran has recently moved nuclear fuel to an overground facility, within easy reach of Israeli bombs.  The theories for Iran’s counterintuitive strategic move range from the “wow, they’re so sneaky and strategic” to the “duh, they did what?!”.  Interpretations of Amazon’s move fall into same categories.

Advertisement