War of the Words: The Kindle, Nook, iPad, and Kobo Are Engaged in Vicious E-Reader Price War

In bookstores, coffee shops, and internet cafes around the world, a vicious price war is stewing. On Monday, Barnes & Noble aggressively cut the price of their flagship E-Reader, the Nook, to $199 USD, while simultaneously dropping the price of the low cost, Wi-Fi only version to $149 USD. Hours later Amazon fired back, slashing the price of its popular Kindle to $189 USD, a significant discount from the original price of $259 USD. As the technology battle continues to heat up, investors and customers continue to feel uncertain regarding the future of the global E-Reader market. How long will it be until we see E-Readers priced at $99, $9, or even free with the purchase of online books? How aggressively will the E-Reader market expand? Will the E-Reader permanently cannibalize bound book sales? Finally, if perfect competition pushes the price of the E-Readers to $0, what impact will this have on Amazon's stock price, assortment, and content?

As with any technology, component costs are one of the most significant factors influencing end market pricing. Reductions in component cost enable retailers and resellers to reduce the cost of technology products, assuming that manufacturers disclose or pass on the cost savings to market re-sellers. One component that continues to have a significant impact on the cost of E-Readers is the processor. To date, processes continue to account for a significant portion of the total E-Reader cost. Freescale, a semi-conductor manufacturer that creates microprocessors, sensors, radio frequency semiconductors, and software for products used around the world, currently produces 90% of the  microchips found in commercial E-Readers. Freescale maintains partnership agreements with Sony and Amazon, and continues to expand its influence within the semiconductor market. Announced earlier this year, Freescale's new E-Reader chip is said to cost less than $10 USD to manufacture (versus the previous $150 USD). It has the capability to support future color displays, which should enable the mass commercialization of color E-Readers by the end of 2010.

As the E-Reader capacity, battery life, and screen quality continue to evolve, uncertainty remains regarding what this evolution will these mean overall for the E-Reader market? Within the E-Reader segment, new E-Readers are certain to be more energy efficient, faster, and last longer, all while retailing at a significantly lower price than current market prices. Additionally, the intense price competition and low cost emphasis will likely lead to extensive customization and differentiation between products. Already, consumers are seeing more differentiation within the market, with Barnes & Noble's Wi-Fi Nook featuring a unique LendMe option which enables customers to share E-Books with friends for 14 days without charge. As well, a recently released software update gives both Nook 3G and Wi-Fi customers free access to AT&T Wi-Fi hotspots. As access increases, so will product attractiveness.

When evaluating the E-Reader market, it is important to keep recent market activity in perspective. While many investors expected Amazon to reduce the Kindle’s price, few expected them to respond so quickly. Their response, portrays a company insecure in its market position, and raises some potential red flags for investors. Did Amazon not expect this price movement? Are their margins wide enough to deal with the price movement? Does their reaction imply that E-Reader consumers have a higher than normal elasticity or price sensitivity? While the answers to these questions are not obvious, it does seem unlikely that initial cuts will aggressively accelerate the purchase of E-Book readers, at least in the short term. Furthermore, while this price war continues to garner media attention, it is important to recognize that the E-Reader market is still small. In 2009, only 9% of U.S. adults bought at least one E-book last year, and growth globally within the E-Reader segment continues to progress slowly. With the rise of the ePub format, it is likely that the E-Reader category will expand, particularly as corporations embrace open source formats, operating systems, and firmware.

Despite the cautionary tone, many companies continue to bet their collective fortunes on the E-Reader, hoping that it will someday replace bound books. While this is a possibility, one product that continues to jeopardize the sustainability of the E-Reader market is the Apple iPad. Since early June, iPad users have downloaded more than five million books, and iPad sales estimates for 2010 are set at 3.75 million units. By the year 2011, analysts expect the iPad to sell more than 6.3 million units. Currently, E-Readers do only one thing, and do not provide web surfing or video. While this niche positioning is attractive, the ultimate question is whether consumers will continue to to pay more for the Apple brand or sacrifice functionality for a lower price position. As Apple continues to push aggressively into the E-Reader market, and companies like Amazon and Kindle continue to fight for share, I believe the price of the Nook, Kindle and other E-Readers will continue to fall toward $99 by the end of 2010. Once the $99 price point is breached, it is only a matter of time until the $0 price point becomes a reality. As this happens, the number of E-Readers purchased or distributed will rise to 6 million by the end of 2010, and eventually to 19.2 million in 2013. While these sales and distribution will continue to create opportunities for E-Reader manufacturers, the falling prices will continue to challenge profits, particularly as iPad sales increase. E-Readers may be beautiful, stylish, and sleek, but at the end of the day, content is king. As the Kindle, Nook, Kobo, and other platforms continue to fight for E-Reader market dominance, I wouldn't be surprised if Apple's iPad ends up getting the last laugh.