E-readers, with their breakthrough e-ink technology, have been around the market for a few years but research firm IHS iSuppli has placed their lifespan on the order of that of the Betamax. Total e-reader shipments, including Amazon's (NASDAQ:AMZN) Kindle to Barnes & Noble's (NYSE:BKS) Nook to Kobo, reached 23.2 million units in 2011, and this year. But their sales are projected to drop by a staggering 36% to 14.9 million in 2012, and to 10.9 million in 2013. Moreover, this trend is likely to continue with shipments falling to 7.1 million units by 2016, as the dedicated e-reader fulfills the same niche as other failed, intermediate technologies.
A Display of Competition
The rise and fall of products in consumer electronics is nothing new but this rapid decline for e-readers is highly unusual. Tablets and, to a lesser extent, smartphones have eroded the market for e-readers, providing a lot of the functionality for casual readers. One of the advantages of the e-reader, the screen designed to be easy on the eyes, has been eroded somewhat by superior screen technology that can also drive a smartphone and tablet, i.e. super AMOLED displays and Apple's (NASDAQ:AAPL) Retina displays. This has put strong pressure on the e-reader business.
Add in the age-old battle between "single-tasking" devices - such as e-readers and MP3 players - versus "multi-tasking" gadgets, the former always loses as technology drives integration of services. This is why Microsoft's (NASDAQ:MSFT) Zune will forever stand as the acme of a dead technology - the dedicated music player - and Microsoft's ineptitude. Had the Zune come out two years earlier today's mobile landscape may look completely different. But, by the time Microsoft had perfected the music player, Apple created the iPhone and that was that.
However, even with all of this said, I do not believe that e-readers are going to vanish from the market. Instead they will command their own niche and still have the opportunity to explode in emerging markets.
The price of these devices, starting as low as $69 (and still falling), makes them so affordable to the low-income countries of Asia Pacific and Africa. The e-book market still has tremendous growth potential as the devices command 30% of U.S. and 20% of the U.K's population but are virtually absent from the rest of the world. For hardcore readers, the Kindle or Nook offers a far superior reading experience, even in bright sunlight, compared with a multi-function tablet. The former are based on e-ink pearl, which allows hours and hours of reading with minimal power consumption and little eye strain. Add in their light weight and the dedicated e-reader still speaks to the avid reader.
The technology is itself developing quickly with the additions of front-lit e-readers such as Kindle Paperwhite, Nook GlowLight and Kobo Glo. We know that the next breakthrough is going to be color e-ink just to make things interesting. The technological developments here are taking their own course, independent of the progress in tablets. If anything Nokia's (NYSE:NOK) ClearBlack AMOLED displays found on its Lumia smartphones are probably the biggest threat to dedicated e-readers as those displays point to a future where LED-driven displays can be used effectively in direct sunlight.
But, today is not that day and so e-readers will continue to sell as the market adjusts further to a life without printed books.
I do not consider Nook HD or Kindle Fire an ideal product for avid readers. They are tweeners - hybrid e-readers with great displays that can also function as basic tablets.
The War for the Virtual Book
Meanwhile, the e-reader price wars have escalated in the U.K, which has been dominated by Kindle with ~90% of the market, after B&N entered the market. The Nook is now available at eight of the U.K's biggest retailers as well as through Nook's U.K website. Moreover, the price of Nook's lowest end e-reader, Nook Simple Touch, has been reduced to £59 ($95), which makes it £10 ($16.11) cheaper than Amazon's Kindle Basic. However, Simple Touch (with touchscreen) is a far superior product than Kindle Basic (without touchscreen) and can be more closely compared with the Kindle Touch priced at £109 ($175.65). This is the effect of Microsoft's stake in Nook, giving it the ability to sell at a thin/negative margin to gain market share with what is admittedly superior technology. It's a similar strategy Microsoft and Nokia are taking with the Lumia 920 and it seems to be working.
In the U.S however, the Kindle Basic sells for $69, which makes it the cheapest e-reader on the market. Add $10 and you'll get a Nook Simple Touch for $79, which unlike the Kindle basic, is ad-free. For $119, American readers can get a Kindle Paperwhite - with built-in light - or a Nook Simple Touch with GlowLight - whose price has been reduced to match that of Paperwhite.
Besides the top U.K retailers, B&N also has Target and Wal-Mart on its side as both are selling Nooks and not Kindles this holiday season. Amazon sees the Kindle as a gateway to its online mega-mart and its forked version of Android is purpose-built to deliver not only media but suggestions to upsell everything else Amazon offers.
Nook is not as threatening to Target and Wal-Mart as B&N wants to sell specifically media and has no interest in competing for the supermarkets' other business. If anything those stores would rather not devote any floor space to media at all. By promoting the Nook it makes their relationship complementary, not adversarial.
On the other hand, positively for Amazon, the EU anti-trust probe into e-book pricing has finally concluded in Amazon's favor after Apple and four publishers gave the green light to Amazon to see its own prices for e-book prices for the next two years. The probe started last year when it was revealed that Apple had entered into agreements with publishers, which prevented retailers - such as Amazon - from undercutting Apple's prices.
Both B&N and Amazon are looking at the devices themselves as effectively loss-leaders to sell media and advertising and have other business, which is profitable to continue this fight for the longer term. At this point both are great forces for consumers but what's often good for consumers is not great for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.