Recent pricing changes by Amazon and Barnes & Noble will accelerate the emergence of the ebook market. Both Amazon and Barnes & Noble sharply lowered the price of their electronic readers. In addition, Amazon increased the royalty rate for its authors from 35% to 70%.

Taken together, these announcements show that mainstream booksellers recognize the enormous potential of the digital book market. As a result, they are willing to forgo profits today to gain market share. So they are scrambling to attract readers and authors to their platforms.

Amazon's new price structure also includes important clues about what the electronic book market will look like just a few years. Amazon is offering authors a 70% royalty if they price their ebooks between $2.99 and $9.99. This makes Amazon's sub $10 price range much more attractive to authors. Publishers have long resisted this price point because it cannibalizes the prices of their printed books. However, Amazon's policy will make digital book sales much more attractive than print sales at most prices, dispelling author opposition. It is a good bet that in the very near future all new releases will cost less than $10 and backlist books will sell for less than five dollars.

Another reason Amazon offered a 70% royalty was to match the royalty offered by Apple for books read on its iPad. Electronic books have enormous margins. Amazon has indicated that its cost to distribute an electronic book is less than six cents. Distributors are recognizing that they will have no choice but to give a significant margin to win and maintain market share. However, even if the distributor sells a digital book for $3 and pays the author $2.10, he is still making a 93% margin. That is not a bad business, if the volume is high.

And the volume is there. Amazon also announced that it was selling far more electronic books than hardcover books, and that the trend is accelerating. This is hardly surprising as so many avid readers, one of the primary markets for hardcover books, find reading an electronic book cheaper and more convenient. As the price of readers falls, occasional readers will also discover the advantages of reading electronically.