Price war, iPad rapidly re­shap­ing young e-book mar­ket

amid stiff com­pe­ti­tion, newer de­vices strug­gle to stay afloat

Austin American-Statesman - - TECHMONDAY - By Jef­fry Bar­tash

WASHINGTON — The e-book mar­ket cre­ated by the Ama­ Kin­dle just a few years ago al­ready is un­der­go­ing a shake-up and soon could see a shake­out.

Just six months ago, at least a dozen com­pa­nies were pre­par­ing to launch, or had al­ready launched, new e-read­ers in the U.S. to chal­lenge Ama­zon and grab a piece of a small but rapidly grow­ing pie. Now, it ap­pears sev­eral e-read­ers will never make it to the mar­ket while oth­ers could die a quick death.

Last month, for ex­am­ple, iRex Tech­nolo­gies filed for bank­ruptcy pro­tec­tion ow­ing to poor sales of its e-reader. An­other com­pany, Plas­tic Logic, de­layed the re­lease of its own de­vice called the Que, cast­ing doubt on whether it will ever see the light of day.

What’s go­ing on? Sim­ple. Prices of e-read­ers have fallen faster and fur­ther than any­one ex­pected. Ama­zon, for in­stance, has slashed the price of the pop­u­lar Kin­dle to $189 from $359 just one year ear­lier.

The cat­a­lyst for the sud­den de­cline can be di­rectly tied to two com­pa­nies: mam­moth book­seller Barnes & Noble and com­puter and con­sumer elec­tron­ics gi­ant Ap­ple Inc.

Late last year, Barnes & Noble in­tro­duced its own e-reader, the Nook, for $259, and it quickly sold out. The Nook had the added ad­van­tage of be­ing avail­able in phys­i­cal stores, which al­lowed shop­pers to ac­tu­ally see and han­dle the de­vice. Un­til its re­cent launch with Tar­get, the Kin­dle has only been avail­able on the Ama­zon web­site.

Last month, Barnes & Noble cut the price of the Nook to $199, and Ama­zon re­sponded the same day by drop­ping the Kin­dle to $189.

The cuts are so deep, mar­ket-re­search firm iSup­pli cal­cu­lates, that the cost of mak­ing the e-read­ers is vir­tu­ally equal to their price. The re­sult: Ama­zon and Barnes & Noble can’t make money on the sale of de­vices, so prof­its will have to come from the sale of dig­i­tized books and other con­tent.

“This is the same ra­zor/ra­zor blade busi­ness model suc­cess­fully em­ployed in the video game con­sole busi­ness, where the hard­ware is sold at a loss and prof­its are made on the sale of con­tent,” said Wil­liam Kidd, an iSup­pli an­a­lyst.

While Barnes & Noble has pushed prices lower, the iPad has given con­sumers an­other op­tion while set­ting a ceil­ing on how much man­u­fac­tur­ers of e-read­ers can charge.

At just 1½ pounds, the iPad is the first truly func­tional tablet com­puter. It can per­form sim­i­lar func­tions as a lap­top, but it’s much thin­ner and lighter — and costs $499, just $100 more than the orig­i­nal Kin­dle. Ap­ple sells books for the iPad through its own on­line store, and cus­tomers can even down­load Kin­dle soft­ware to read books bought on Ama­zon.

The rev­o­lu­tion­ary na­ture of the iPad — never mind the pric­ing — im­me­di­ately cast doubt on the fu­ture of high-end e-read­ers such as the Que or even Ama­zon’s su­per­sized Kin­dle DX reader. Ama­zon cut the price of the DX to $379 from $489.

Plas­tic Logic, for its part, had planned to sell ver­sions of the Que start­ing at $650 and reach­ing as high as $800.

“Plas­tic Logic got much ac­claim, but the price was too high, es­pe­cially af­ter the iPad came out,” said Avi Green­gart, di­rec­tor of con­sumer de­vices at Cur­rent Anal­y­sis.

What’s less clear is whether there’s an ap­petite for a mid­priced hy­brid de­vice that com­bines some func­tions of a com­puter with a ba­sic e-reader. Cal­i­for­nia-based Spring De­sign makes a snazzy de­vice called Alex ($399) that looks like a Kin­dle, but it also in­cludes a small LCD color screen for surf­ing the In­ter­net and check­ing e-mail.

Spring De­sign spokes­woman Pat Meier-John­son said the com­pany has no plans to re­duce its price. She as­serts there is a mar­ket for a de­vice that com­bines easy In­ter­net brows­ing with the small size of an e-reader, which weighs half as much as an iPad.

“The iPad is fan­tas­tic, but the Alex is very dif­fer­ent than other de­vices,” she said.

Many an­a­lysts are skep­ti­cal. Allen Weiner of Gart­ner Inc. calls de­vices like the Alex a “tweener” that is un­likely to carve out a suc­cess­ful niche be­tween the iPad and Kin­dle. The price of those de­vices would have to come down sharply, mak­ing it dif­fi­cult for new com­pa­nies to re­coup their devel­op­ment costs and turn a profit, he said.

Price cuts on the Kin­dle and Nook, mean­while, will make it harder for new ri­vals, es­pe­cially lit­tle-known ones, to break into the mar­ket at the low end. Both Ama­zon and Barnes have pow­er­ful brand names in the book busi­ness, mas­sive mar­ket­ing mus­cle and huge dis­tri­bu­tion net­works — not to men­tion big head starts.

“When you go into Best Buy, are you go­ing to buy an e-reader from iWho or are you go­ing to buy a Kin­dle or a Sony?” said an­a­lyst James Brehm with Frost & Sul­li­van. “You are go­ing to buy the Kin­dle or Sony.”

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Ap­ple has of­fered cus­tomers an­other e-reader op­tion with its iPad, which weighs just 1½ pounds. Ap­ple sells books for the de­vice – mar­keted pri­mar­ily as a tablet PC – through its on­line store.

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Ama­ has dom­i­nated the elec­tronic book mar­ket for the past few years with the Kin­dle, but re­cent re­leases from Barnes & Noble and Ap­ple are of­fer­ing for­mi­da­ble com­pe­ti­tion.

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