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iPad Spurs eBook Reader Price War

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The move by Barnes & Noble as well as Amazon to slash the prices of their eBook readers reflects a fundamental change in their business strategy intended to counter the rising competitive pressure from Apple Inc.’s iPad.

Barnes & Noble on Monday slashed nearly $60 off the $199 prices of Nook eBook reader. Hours later, Amazon dropped the retail price on the Kindle eBook reader to $189, down from $259. Not coincidentally, Apple launched its iBook application, making the free reader software available on the iPad, iPhone and iPod.

“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, according to iSuppli’s Teardown Analysis Service,” said William Kidd, director and principal analyst, financial services for iSuppli. “With zero profits on their hardware, both these companies now hope to make their money in this market through the sale of ebooks. 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.”

In the very short-term, the price drop could entice consumers to purchase eBook readers that cost less than half of the starting price point for an iPad, according to Jordan Selburn, consumer electronics analyst for iSuppli. However, the longer-term future of eBook readers is likely to be more niche than initially expected.

iSuppli’s forecast calls for global eBook readers shipments to rise to 11 million in 2010, up 120 percent from 15 million in 2009. iSuppli at present doesn’t plan to change this near-term forecast significantly.

Who Books the eBook Sales?
Although there is no doubt that the iPad is encroaching on eBook readers’ hardware sales, the iPad is also spurring the sales of eBook content by Barnes & Noble and Amazon. However, it’s unclear if the two big booksellers benefit to a significant degree.

Both the Nook and Kindle apps are available for free on the Apple’s iPad, iPhone, and iPod Touch, which is a positive for the booksellers. Nonetheless, a major negative for these companies is that the Apple iBook application will become another consumer destination, further fragmenting the ebook market and hurting their sales of such content.

Hard Row to Hoe for Hardware
Compared to the Kindle, the Nook has nearly 50 percent more components due to the added sophistication of running the full Android OS, the inclusion of WLAN capability and the use of dual displays. The largest cost component of both devices is the e-ink display module provided by PVI, accounting for an estimated 28 to 32 percent of the total BOM for both eBook readers. With these and future price drops, PVI would be affected.

The future of the eBook reader platform will largely depend on whether device manufacturers add technological functions to remain competitive with the more dynamic, multi-function iPad. There is a color e-ink display for eBook readers in development, but according to iSuppli analyst Wayne Lam, the technology is at least a year away from market, at best.

“In sum, there is no visible short-term solution to drive significantly more sales of eBook readers, except to use price as a tool,” Kidd said. “Consequently, at current retail prices, the forward EPS impact is incrementally negative for both companies, as many analysts still need to readjust models to reflect the shift from about a 20 percent gross margin to no margin.”

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