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The eReading industry, though young in age, is in the midst of a profound crisis that appears to threaten its very existence. The iPad (NASDAQ:AAPL) had this effect on the current crop of eReaders and has set in motion a worldwide scramble for answers to the new challenge.

Sony Corp. (NYSE:SNE) introduced the first eReader using E-Ink technology to the American market in 2006. It was a revolutionary product at the time. It turned on in a few seconds and was immediately available for use. Its screen was easy on the eyes, and it was light enough to be held for hours at a time without fatigue. An abundance of internal memory made it possible to hold over a thousand books inside this skinny little gizmo.

Amazon added heft to the industry in 2007 when it began selling the Kindle (NASDAQ:AMZN). Its device has since seized the lead in this now burgeoning market, and their success has attracted other competitors. Late last year, Barnes & Noble (NYSE:BKS) threw its Nook into the ring, and since then a few other suppliers of E-Ink display devices have entered the market. None, however, have sold enough to gain traction against the major players. The iPad, though, with its LCD screen, has achieved market presence that is both undeniable and probably irreversible.

Until this year, Amazon’s Kindle has dominated the hardware side of the industry. Its two Kindle models are said to account from 60% to 70% of all E-Ink device sales. On the software side it’s even more dominant; according to some estimates Amazon delivers an estimated 80% of all eBooks sold.

Sony is thought to account for almost all of what is left, with up to 25% to 30% of device sales. Although Nook sales were not taken into account when these estimates were made, since B&N began their sales efforts only recently, I doubt their omission would alter the estimates much. Keep in mind that none of the vendors report their actual sales, so there is a large area of uncertainty in any estimates published.

One of the more respected forecasters, Forrester Research, estimates that sales of E-Ink devices will be about 6.6 million this year, up from 3.1 million in 2009. If this estimate is anywhere near accurate, it goes a long way in explaining why other device designers and book sellers are seriously trying to elbow themselves a place at the table.

Apple can claim the sharpest elbows this year, since sales of its iPad have reached three million units in less than ninety days after its introduction. Its success as an effective eReader has thrown the entire eReading industry into a frenzy of uncertainty and speculation. Is this the end of E-Ink’s brief and happy life? Those who love reading will answer this question with their wallets over the next year or so, but speculation is rampant in all directions.

On the cataclysmic side of speculations is the view of the iPad as being a “Kindle killer.” This language has been widely circulated in the blogosphere. More prudent predictions, however, see the iPad as capturing about one third of the eReading market, leaving the remaining two-thirds to conventional E-Ink devices.

I don’t pretend to know how much of the eReading business iPad will gain, but it is clear that Apple’s new gadget is a strong competitor to single-purpose devices like the Kindle, Nook and Sony Readers. Its success most likely contributed to the price cuts recently announced by B&N and Amazon. There are probably more shoes to drop before this episode is closed.

Price is but one way the E-Ink vendors can compete against the onslaught of “pads” that are expected in the coming months. E-Ink vendors could bring out their own multi-purpose devices, but to do so would force them to de-emphasize E-Ink screens in favor of internally illuminated LCDs—a heresy in prior years. Or, they could stay with what they have, and continue with marginal improvements and lower prices, hoping the merits of E-Ink will keep a significant portion of serious readers in their camp.

Although there are some promising new innovations with E-Ink color and video capabilities, they are far from being close to production and of questionable quality in their current state. It is difficult to imagine a rate of growth for this technology in the future anywhere near where it has been. This is a serious limiting force for the growth plans of Amazon and others, so it may force them to come out with me-too products in order to stay competitive.

Pricing, though, will be the first line of defense against the new multi-purpose devices. Observers inside and outside the industry have been discussing the need for lower prices for E-Ink machines for months. The consensus, if there ever can be a consensus in such a chaotic industry, is that eReaders at $100 is a fair price. Even today, predictions by industry insiders generally see E-Ink readers in the near future falling below $100 at the low end and not much above it at the high.

Lower hardware prices, though, may not spell the doom that some predict. Costs of production will fall when hardware production is ramped up to millions of units. And if production costs do fall, it will help offset the hit on income caused by selling their products at lower prices.

Additionally, the largest source of profits for the industry is expected to come from sales of eBooks. Lower hardware prices will, in turn, stimulate the already burgeoning growth of electronic titles. The net effect of these counter forces of lower hardware and more software sales may well be positive for earnings, but it won’t be known until the dust settles, probably late next year.

Keep in mind, too, that market share of hardware sales does not necessarily equate to market share of software. Even if the Kindle loses all or much of its market share to other devices, Amazon could continue prospering from sales of electronic books. Their huge inventory of electronic titles will be attractive to many of those that are new to electronic reading, so it is not unreasonable that Amazon will remain a major player in this market.

From its actions, it is clear that Amazon believes they have a future in selling their electronics inventory to non-Kindle owners. Their Kindle eReader for the iPad was available to download on April 3, the day the first buyers got their new toy. This made Amazon’s huge library of electronic books immediately available to iPad owners, and put the camel’s nose squarely in Apple’s tent.

Other noses are also pressing in. B&N got their excellent iPad eReader in the apps menu a month later than Kindle. Kobo has one now, too, and there are a few other specialty readers available for comic book formats and PFD documents not burdened by digital rights management restrictions.

Looking forward, the major clash of the conflict is probably going to be between Amazon and Apple. Each has different advantages in this contest:

Amazon’s advantage lies more on the software side. And here their strengths are formidable:

  • A huge inventory of electronic titles ready to be downloaded today.
  • A wealth of experience in on-line retail sales of eReaders and eBooks.
  • A large installed base of dedicated eReader owners who trust Amazon and think of them first when looking for a new title to read.
  • A sophisticated eReading/syncing system that allows its electronic titles to be read over a wide range of electronic devices, including iPads, iPhones, iPod Touch, BlackBerries, PCs and Macs. An Android app is also promised “soon.”
  • A sterling reputation for honesty and integrity in all segments of their retail operations .

Apple has its share of advantages:

  • The iPad is alone in its category of devices. It seems years ahead of any other device on the market today. From what I have seen of the first competing offerings headed for retail shelves this year, none of them are within a light-year of the iPad.
  • Considerable on-line retailing experience, although not in eBooks.
  • A loyal and devoted customer base for all their products.

It is, of course, possible that both Amazon and Apple will prosper over the long run. I don’t see either actually “killing” the other. Mr. Bezos’ attitude appears to be to let Apple run with what they have. He probably has a few new things up his sleeve for later, but he seems unexpectedly confident that his products will continue to prosper, regardless of the hype and hubris of Apple’s new product.

Other competitors in the E-Ink world also must be considered. B&N, which dominates the printed book world, is too important to ignore. Their advantages are more on the brick and mortar side, which seems likely to be a critical factor. They have yet to translate their success in brick and mortar to the digital domain, but they are struggling mightily to make the transition. The Nook is a credible product in this effort, although it doesn’t stand up well to the iPad(what does?), but at least they have something to sell to their many customers. B&N gives me the impression that they are going “all in” for a share of this new market. It would be foolish to discount their efforts.

Borders is the last book seller to enter the digital market, and they seem content to outsource the hardware to others, and they are relying heavily on the on-line eBook experience of Kobo to power them into digital success. If results follow effort, their expectations should be low.

Sony, of course, is, as always, a different story and more than a little inscrutable. Their eReader hardware and software are quite good, and their software eReader is available to PCs and Macs. But they lag in making their eReader software available on the iPad or on smartphones, and they lack Amazon’s or B&N’s mega-inventory of eBooks. On the plus side, they have a sizable number of eReader owners who look to Sony for titles to buy. I hope they have the midnight oil burning somewhere in Tokyo.

For the eReading public, the future will be exciting as new hardware is deployed—more choices and lower prices. There will be a life or death struggle, however, for some of the weaker players who lack the cushion of a deep product line and pockets deep enough to fund new product development.

For all vendors in the industry it is a challenging time. The players are talented, diverse, and, for the most part, have the financial resources to devote to the battle. If the moves and countermoves made thus far are an indication of the future, then we should expect a tumultuous and exciting story to unfold, and I am prepared for a surprise ending.

Disclosure: The author has no direct positions in any company mentioned, but does own shares in the S&P 500 ETF.

Source: Crisis in the eReading Industry