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An e-Reader Price War or the Inventible Marginalization of a Limited Product
The price-lowering tit for tat between Barnes & Noble (BKS) and Amazon.com (AMZN) over their e-readers, the Nook and Kindle, respectively, looks for all intents and purposes like an old fashioned price war. This is how many are portraying it, but it is quite possibly something bigger. Some might argue that it is most definitely something bigger. Indeed, Apple’s (AAPL) i-Pad has shown that a device similar to an e-reader, but with vastly more functionality, is not only possible, but, for many, preferable.
Book reading devices are an interesting product. They basically strive to do just one thing, but they strive to that one thing exceptionally well. The Kindle was, when it was introduced, an incredible step forward in the space. It wasn’t the first product here, Sony (SNE) has offered a book reader for years, but Amazon’s product married a highly functional product with the easy ability to acquire content. The Nook is simply a knock off on the same idea. In fact, Borders Group’s (BGP) e-reader, the recently introduced Kobo, is yet another knock off with an even cheaper price point than the Nook or the Kindle.
Although currently very popular, e-readers are a niche product. They do one thing, and though doing that one thing very well, they are highly limited offerings. This limitation comes in two forms. First, they are designed almost exclusively for reading books, from their screens to their controls. This is wonderful on one level, but the similarities to more functional devices, such as a keypad, give away the aspirations of being a more functional tool. But largely speaking, they aren’t more functional items, they are just one more thing to carry around. Sales of these products suggest that for voracious readers they are highly prized. For the mass market, however, they are, in reality, probably closer to an expensive toy.
The second limiting factor with e-books is their direct tie to specific retail outlets. If you buy a Kindle you better be prepared to buy all your books from Amazon; the same goes for the Nook. While there are compatible formats and ways to read e-books from other sources on competitors’ products, this requires more knowledge of the products and e-book formats than most customers will want to bother knowing.
These two limitations are material, particularly now that a similarly sized product with vastly more functionality has come to town. Although Apple’s i-Pad suffers from the retailer tie in limitation to some degree, its functionality is much better. In fact, that’s an understatement; the i-Pad verges on being a full computer that can also act as an e-reader. True, the screen isn’t as easy on the eyes, but the additional functionality will probably offset that negative for many users. And there are competing tablet products on the way from virtually every major manufacturer.
This progression is eerily similar to the tale of the Palm Pilot. The category was, interestingly enough, kicked off by Apple with its ill-fated Newton offering. Shortly after that product died, the Palm Pilot sprung to life. This little gizmo provided scheduling and address book functions to start, but, because of an open architecture, quickly drew a large following of willing programmers who created applications of all sorts and sizes. However, despite all of the bells and whistles being added by the masses, it was still just one more thing to lug around. It quickly became obvious that, with advancing technology, many of the functions of a digital assistant could be incorporated into a cell phone. The digital assistant simply couldn’t compete. This is largely why Palm’s (PALM) history is checkered and also why it is about to be swallowed by Hewlett-Packard (HPQ).
Over the years, there have been any number of devices created for just one purpose, such as email reader/writers, pagers, and, more recently, social network reader/writers. These products often end up in the historical dustbin because they simply don’t stand the test of time. It is quite possible that e-readers will find themselves added to this list. They may not disappear completely, but even in the best case they are likely to be greatly marginalized.
This has major implications for the booksellers. First, the closed system of selling books virtually exclusively to one product is faulty. People like to buy from the places they like to buy from using the devices they want to use. Apple has been able to get away with tying customers to its iTune’s store because of design quality, its leadership position in changing the way customers interact with content, and its willingness to allow third parties to create applications, even though they are subject to certain approvals if they are to be sold through Apple’s site. The booksellers don’t have these strengths and are going to have become more open. They are also likely to lose a currently hot selling product.
The death of e-book readers, or at least marginalization of them, isn’t likely to happen overnight. But using history as a rhyming aid, they aren’t likely to remain the hot product that they are today without substantive changes. The only problem is that the changes that customers are likely to demand are going to make e-readers look like tablet computers.
It’s unlikely that Amazon.com, Barnes & Noble, and Borders will be able to compete with true hardware and software products since, at their heart, they are retailers. Although some have suggested that e-book readers are destined to become sales tools, being given away to tie people to a company’s book store like razors are utilized to sell razor blades, this seems like a temporary stop on the way to obsolescence and, if not, a potentially expensive drag on these retailers’ profits. Instead, look for the e-book readers to fade away and be replaced by something more functional and, quite likely, not created by the booksellers.