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Amazon.com and Barnes & Noble might be heating up the e-reader wars this week, with tit-for-tat price cuts on their respective Kindle and Nook devices, but at least one analyst thinks the companies’ current strategy can only extend so far.
On June 21, Barnes & Noble announced a price reduction for its Nook e-reader from $259 to $199, along with a WiFi-only version of the device for $149. The original Nook leverages a 3G connection to download ebooks from the retailer’s online store. Not to be outdone, Amazon announced that same afternoon it would do a little cost-cutting of its own, resetting the price of the original Kindle from $259 to $189.
A few e-readers already exist at that lower price point, including the Kobo, which is marketed through Borders and sells for $149. Sony’s Reader Pocket Edition retails for $169. Amazon and Barnes & Noble also seem determined to add new software features to their respective platforms, including Android-based games for the Nook and some social-networking functionality to the Kindle.
Both companies are responding to not only each other, but also the growing threat presented by Apple’s iPad, which includes a full-color e-reader application. During Apple’s Worldwide Developers Conference earlier in June, CEO Steve Jobs indicated that some 5 million ebooks had been downloaded through the company’s iBookstore, roughly 2.5 per iPad.
Despite predictions by some analysts that the price of e-readers might continue to dive, one suggests a limit to how low manufacturers can go.
“With these cuts, eBook readers from Barnes & Noble as well as Amazon now are priced at about the breakeven level with their Bill of Materials (BOM) and manufacturing costs,” William Kidd, director and principal analyst of financial services for iSuppli, wrote in a June 24 statement. “With zero profits on their hardware, both these companies now hope to make their money in this market through the sale of books.”
Whether that strategy proves successful, it does have a precedent in the tech world, according to Kidd: “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 sales of content.”
The larger problem facing the e-reader industry, Kidd added, is how soon it can add new features, such as color e-ink displays, that significantly boost demand: “There is no visible short-term solution to drive significantly more sales of ebook readers, except to use price as a tool.”
The breaking of the $200 price point for e-readers, combined with the enormous amount of marketing muscle that both Amazon and Barnes & Noble can apply, also means that smaller competitors could be soon forced out of business.
“I don’t see more than two, maybe three dedicated reading companies in the market for selling ebooks,” William J. Lynch, CEO of Barnes & Noble, told The New York Times on June 21. “I think you are starting to see a shake-out now.”