Tim O’Reilly, the founder and C.E.O. of O’Reilly Media, which publishes about two hundred e-books per year, thinks that the old publishers’ model is fundamentally flawed. “They think their customer is the bookstore,” he says. “Publishers never built the infrastructure to respond to customers.” Without bookstores, it would take years for publishers to learn how to sell books directly to consumers. They do no market research, have little data on their customers, and have no experience in direct retailing. With the possible exception of Harlequin Romance and Penguin paperbacks, readers have no particular association with any given publisher; in books, the author is the brand name. To attract consumers, publishers would have to build a single, collaborative Web site to sell e-books, an idea that Jason Epstein, the former editorial director of Random House, pushed for years without success. But, even setting aside the difficulties of learning how to run a retail business, such a site would face problems of protocol worthy of the U.N. Security Council—if Amazon didn’t accuse publishers of price-fixing first.

The iBooks store seemed to provide a solution, which helps explain why five of the big-six publishers signed up without much apparent hesitation. The only holdout was Random House, the largest of the big six. Markus Dohle, the chairman and C.E.O., said that he shared the concern about the price of e-books but believed that publishers are being hasty in making agency-model deals with Apple or Amazon. “The digital transition will take five to seven years,” he said. “For me it’s not a question of a week, or a hundred days.”

Dohle, who is forty-one years old, rose as an executive on the printing side of Bertelsmann A.G., the parent company of Random House, and moved to the U.S. in 2008. He believes that as an outsider he sees the challenges to the industry more clearly. “If you want to make the right decision for the future, fear is not a very good consultant,” he said. Before accepting “a significant change in the business model,” he wants to take time “to talk to all our stakeholders,” including authors, agents, and booksellers. “For us in the publishing industry,” he said, “Amazon has been the fastest-growing customer. I think it’s a great company.” He welcomes Apple’s entrance into e-publishing, but says, “If you do a deal with Apple on the agency model, then it means that you have to do agency deals with all other e-booksellers.”

Michael Shatzkin, the C.E.O. of Idea Logical, a media-consulting firm, believes that Random House is holding out for a better deal. So do many of Dohle’s peers. But Shatzkin, who writes a publishing blog, also noted on the blog that by maintaining the status quo—selling e-books to Amazon at hardcover prices and letting Amazon take a loss—Random House will be making the most of its short-term sales and profits. “Random House will collect more money for each e-book sold than their competitors do while the public will pay less for each Random House e-book,” he wrote.

Dohle has also resisted “windowing,” the practice of delaying the release of e-books, which has become common among other publishers. Windowing isn’t a new idea; publishers have long withheld paperbacks to encourage hardcover sales, and in the movie business DVDs often appear a year after theatrical releases. But with e-books windowing can act against the best interests of publishers and authors. On January 11th, HarperCollins released the hardcover edition of “Game Change,” by John Heilemann and Mark Halperin; the e-book didn’t go on sale until February 23rd. The hardcover’s first print run, seventy thousand copies, sold out soon after it was released, and for nearly three weeks bookstores around the country had no copies in stock. The authors and the publisher were deprived of income, as potential readers found other books to buy.

Amazon’s Russ Grandinetti thinks that windowing is a mistake. “It won’t work,” he says. “Over time, people will read what they want. When a book comes out, authors need all the publicity they can get. To put up an arbitrary barrier and keep it out of the hands of someone who might evangelize that work is a bad business decision for the author. Not to mention frustrating for the customer.”

According to Grandinetti, publishers are asking the wrong questions. “The real competition here is not, in our view, between the hardcover book and the e-book,” he says. “TV, movies, Web browsing, video games are all competing for people’s valuable time. And if the book doesn’t compete we think that over time the industry will suffer. Look at the price points of digital goods in other media. I read a newspaper this morning online, and it didn’t cost me anything. Look at the price of rental movies. Look at the price of music. In a lot of respects, teaching a customer to pay ten dollars for a digital book is a great accomplishment.”

In Grandinetti’s view, book publishers—like executives in other media—are making the same mistake the railroad companies made more than a century ago: thinking they were in the train business rather than the transportation business. To thrive, he believes, publishers have to reimagine the book as multimedia entertainment. David Rosenthal, the publisher of Simon & Schuster, says that his company is racing “to embed audio and video and other value-added features in e-books. It could be an author discussing his book, or a clip from a movie that touches on the book’s topic.” The other major publishers are working on similar projects, experimenting with music, video from news clips, and animation. Publishers hope that consumers will be willing to pay more for the added features. The iPad, Rosenthal says, “has opened up the possibility that we are no longer dealing with a static book. You have tremendous possibilities.”

It remains an open question whether consumers accustomed to paying $9.99 for an e-book will be willing to pay $13.99, or more, regardless of extras. Tim O’Reilly, the e-books publisher, has found that the lower the price the more books he sells. O’Reilly’s company sells e-books as apps for the iPhone for $4.95, and he says that they generate “a lot more volume” and profit than his company loses in hardcover sales.

Jason Epstein believes that publishers have been handed a golden opportunity. The agency model, he says, is really another form of the consortium he proposed a decade ago: “Publishers will be selling digital books directly to the iPad. They are using the iPad as a kind of universal warehouse.” By doing so, they create opportunities to cut payroll and overhead costs. Epstein said that e-books could also restore editorial autonomy. “When I went to work for Random House, ten editors ran it,” he said. “We had a sales manager and sales reps. We had a bookkeeper and a publicist and a president. It was hugely successful. We didn’t need eighteen layers of executives. Digitization makes that possible again, and inevitable.”

Amazon seems to believe that in the digital world it might not need publishers at all. In December, the Simon & Schuster author Stephen Covey sold Amazon the exclusive digital rights to two of his best-sellers, “The 7 Habits of Highly Effective People” and “Principle-Centered Leadership.” The books were sold on Amazon by RosettaBooks, and Covey got more than half the net proceeds. One publisher said, “What it did for us was confirm that Amazon sees itself as much as a competitor as a retailer. They have aspirations to be a publisher.”

A close associate of Bezos puts it more starkly: “What Amazon really wanted to do was make the price of e-books so low that people would no longer buy hardcover books. Then the next shoe to drop would be to cut publishers out and go right to authors.” Last year, according to several literary agents, a senior Amazon executive asked for suggestions about whom Amazon might hire as an acquisitions editor. Its Encore program has begun to publish books by self-published authors whose work attracts good reviews on Amazon.com. And in January it offered authors who sold electronic rights directly to Amazon a royalty of seventy per cent, provided they agreed to prices of between $2.99 and $9.99. The offer, one irate publisher said, was meant “to pit authors against publishers.”

Grandinetti concedes that Amazon has tried to make more direct deals with authors: “We’re constantly looking for ways we can do something more efficiently.” He suggested that this was nothing new. “There’s a long history of booksellers in the publishing business,” he said, mentioning Barnes & Noble. Major publishers, he points out, all sell books directly to consumers on their Web sites. “It seems like they’re in our business, so it’s a strange argument to worry about this in the other direction,” he said. But publishers’ sales through their own Web sites are negligible, and though Barnes & Noble’s publishing program antagonized publishers, it did not threaten a wholesale devaluation of their products. O’Reilly believes that publishers have good reason to be anxious. “Amazon is a particularly farsighted, powerful, and ruthless competitor,” he says. “I don’t think we’ve seen a business this competitive in the tech space since Microsoft.”

For the time being, Apple’s entrance into the book market has given publishers a reprieve. A close associate of Bezos said, “Amazon was thinking of direct publishing—until the Apple thing happened. For now, it was enough of a threat that Amazon was forced to negotiate with publishers.”

Asked to describe her foremost concern, Carolyn Reidy, of Simon & Schuster, said, “In the digital world, it is possible for authors to publish without publishers. It is therefore incumbent on us to prove our worth to authors every day.” But publishers have been slow to take up new technologies that might help authors. Andrew Savikas, O’Reilly Media’s vice-president for digital initiatives, is shocked that publishers have done so little to create digital applications for their books. “Nothing is stopping publishers from putting apps for books on iPhones,” he said. “There are fifty million iPhones in the world. That’s a great customer base.” Budget-conscious publishers have also reduced the editing and marketing and other services they provide to authors, which has left a vacuum for others to fill. Author Solutions, a self-publishing company in Bloomington, Indiana, has ninety thousand client-authors. For books that attract commercial interest, the company has partnered with publishers like Harlequin to release them through traditional channels, but with more generous royalties.

Jane Friedman, who served as president and C.E.O. of HarperCollins, left in 2008 and established Open Road Integrated Media, an e-book venture. She plans to acquire electronic rights to backlists, sign up new authors (with fifty-per-cent profit-sharing), and form a self-publishing division. “The publishers are afraid of a retailer that can replace them,” Friedman said. “An author needs a publisher for nurturing, editing, distributing, and marketing. If the publishers are cutting back on marketing, which is the biggest complaint authors have, and Amazon stays at eighty per cent of the e-book market, why do you need the publisher?”

Publishers maintain that digital companies don’t understand the creative process of books. A major publisher said of Amazon, “They don’t know how authors think. It’s not in their DNA.” Neither Amazon, Apple, nor Google has experience in recruiting, nurturing, editing, and marketing writers. The acknowledgments pages of books are an efficiency expert’s nightmare; authors routinely thank editors and publishers for granting an extra year to complete a manuscript, for taking late-night phone calls, for the loan of a summer house. These kinds of gestures are unlikely to be welcomed in cultures built around engineering efficiencies.

Good publishers find and cultivate writers, some of whom do not initially have much commercial promise. They also give advances on royalties, without which most writers of nonfiction could not afford to research new books. The industry produces more than a hundred thousand books a year, seventy per cent of which will not earn back the money that their authors have been advanced; aside from returns, royalty advances are by far publishers’ biggest expense. Although critics argue that traditional book publishing takes too much money from authors, in reality the profits earned by the relatively small percentage of authors whose books make money essentially go to subsidizing less commercially successful writers. The system is inefficient, but it supports a class of professional writers, which might not otherwise exist.

Madeline McIntosh, who is Random House’s president for sales, operations, and digital, has worked for both Amazon and book publishers, and finds the two strikingly different. “I think we, as an industry, do a lot of talking,” she said of publishers. “We expect to have open dialogue. It’s a culture of lunches. Amazon doesn’t play in that culture.” It has “an incredible discipline of answering questions by looking at the math, looking at the numbers, looking at the data. . . . That’s a pretty big culture clash with the word-and-persuasion-driven lunch culture, the author-oriented culture.”

Most publishers mistrust Amazon and think it is unnecessarily secretive. It won’t tell them details about customer habits, or the number of Kindles sold, or what it costs to make a Kindle. It won’t even disclose the percentage of revenues its book sales represent, saying only that “media”—movies, music, and books—accounted for fifty-two per cent of sales in 2009.

Publishers say that the negotiations with Apple were less contentious. There were arguments over the price of e-books, with publishers wanting the top price set at seventeen dollars and Apple insisting on fifteen. “Once Apple had determined that they were going to accept the agency model,” a publisher said, “they were very tough: Take it or leave it.” But the Apple people “had a much more agreeable feel than Amazon did. They said they would share some consumer data about buying e-books. We have no such data from Amazon.”

Publishers have another recently converted ally: Google, which not long ago they saw as a mortal threat. In October, 2004, without the permission of publishers and authors, Google announced that, through its Google Books program, it would scan every book ever published, and make portions of the scans available through its search engine. The publishing community was outraged, claiming that Google was stealing authors’ work. A consortium of publishers, along with the Authors Guild, filed a lawsuit, which was resolved only in the fall of 2008, when Google agreed to pay a hundred and twenty-five million dollars to authors and publishers for the use of their copyrighted material. John Sargent, who was part of the publishers’ negotiating team, said the agreement is a huge accomplishment. “The largest player in the Internet game agreed that in order to have content you have to have a license for it and pay for it, and that the rights holder shall control the content,” he said. Whether or not the settlement is ultimately approved by the U.S. courts, Google will open an online e-books store, called Google Editions, by the middle of the year, Dan Clancy, the engineer who directs Google Books, and who will also be in charge of Google Editions, said.

Clancy said that the store’s e-books, unlike those from Amazon or Apple, will be accessible to users on any device. Google Editions will let publishers set the price of their books, he said, and will accept the agency model. Having already digitized twelve million books, including out-of-print titles, Google will have a far greater selection than Amazon or Apple. It will also make e-books available for bookstores to sell, giving “the vast majority” of revenues to the store, Clancy said. He suggested that in trying to dominate the market Amazon and Apple were taking the wrong approach to business online. “It’s much more of an open ecosystem, where you find a way for bricks-and-mortar stores to participate in the future digital world of books,” he said. “We’re quite comfortable having a diverse range of physical retailers, whereas most of the other players would like to have a less competitive space, because they’d like to dominate.”

For now, many publishers believe that they have won the chess match that Sargent started. “We have three behemoths now competing,” the C.E.O. of one house said. “So one of them can’t force us to do anything unless the others go along.” Early sales of the iPad are promising: Apple said that more than three hundred thousand sold the first day, and analysts have guessed that between five and seven million will be sold this year. And a dozen other digital reading devices were on display at the Consumer Electronics Show, in Las Vegas, in January, providing more competition for the Kindle.

Publishers have another reason to hope. The recession has changed the thinking of Silicon Valley companies, shaking their faith in advertising as their only source of revenue. YouTube has begun charging for some independent movies, in an effort to compete with Netflix, and its managers know that to succeed it must have professionally produced content that advertisers—and consumers—will pay for. As digital companies begin charging for content, they are met in the middle by old-media companies looking for ways to charge for what they produce. The incentives for old and new media to form partnerships seem to converge.

“Ultimately, Apple is in the device—not the content—business,” the Apple insider said. “Steve Jobs wants to make sure content people are his partner. Steve is in the I win/you win school. Jeff Bezos is in the I win/you lose school.” Jobs recently met separately with New York Times, Wall Street Journal, and Time Inc. executives to demonstrate the iPad’s potential to make money for newspapers and magazines. Jobs, who had a liver transplant last year and has battled pancreatic cancer, has begun to think about his legacy, the insider said. “He’s in a hurry to create in the next two years what he may have been thinking about in the next ten years. What keeps him going is his vision. Nothing is going to stop him, except death.” The insider said that Jobs was pleased with his advocacy of publishers: “He feels like he’s their champion.”

For the moment, Jobs is the publishers’ best ally. “Steve is very proud that Macmillan put a gun to Amazon’s head,” the insider said. But in the long term Apple and Google will not necessarily be better partners than Amazon. One day, they, too, will complain about the cumbersome publishing process, or excessive prices. Just days before the iPad went on sale, on April 3rd, there were rumors that Apple might list best-sellers for as little as $9.99. Apple agreed to the agency model for just one year, and, as publishers are acutely aware, Jobs has a history, with music and television companies, of fighting to reduce prices. One publisher said, “Maybe Apple will want to come back in a year and bite our heads off.” The iPad may even make it possible for Amazon to reach new consumers. Apple now offers about sixty thousand e-books, far fewer than Kindle does, and Amazon has launched an app that allows it to sell e-books on the iPad. No matter where consumers buy books, their belief that electronic media should cost less—that something you can’t hold simply isn’t worth as much money—will exert a powerful force. Asked about publishers’ efforts to raise prices, a skeptical literary agent said, “You can try to put on wings and defy gravity, but eventually you will be pulled down.” ♦

*The original piece described publishers’ costs incorrectly.