[Steven Lyle Jordan]

I think the expectation would be that, since e-books are easier to distribute and store, more flexible to read, easily downloaded online without a trip to the store or a wait for shipping, that e-books would be able to sell in greater numbers than paperbacks and hardbacks. If you price them lower than paperbacks, that increases their likely increased sales. Once e-books catch on and sales are greater than paperback and hardback, you can sell the e-book for less unit cost, and still make a higher profit than that of paperbacks and hardbacks (obviously not counting the cost of printing the pbacks and hbacks).

This is the very principle that justifies the paperback, being sold in larger numbers at lower cost than hardbacks. If paperbacks did not make as much as hardbacks, they would not be printed (as, in fact, many hardbacks never see paperback versions, because it is believed that they will not sell well in that format). It is also how DVDs make up for lost movie profits, by selling more copies at lower cost, and how concerts make up for minimal profits by selling more CDs at lower cost... in entertainment, this economic model holds well.

Apply the same economics to e-books, and you achieve your profit goals when e-books become regular commodities more widely sold than paperbacks. So the catch is to make them desireable enough to outsell paperbacks and hardbacks, either through a great reader experience (the iPod of readers), or with value-added extras (like the extra features on a DVD, or the improved audio quality and extra cuts on a CD).