The price war is on in the e-reader market as Barnes & Noble and duel to increase market share for their nook and Kindle devices, respectively. However, the larger question for these companies is whether there’s a future for e-readers — which are designed mostly for reading books, newspapers and magazines — in a consumer world that is becoming more and more enamored of tablets that can do it all, say experts at Wharton. “The stand-alone e-reader may replace my books, but it’s likely to face tough competition from an iPad,” notes Eric Clemons, an operations and information management professor at Wharton.

On June 21, Barnes & Noble cut the price of its nook e-reader to $199 from $259 and introduced a Wi-Fi-only version for $149. Hours later, Amazon cut the price of its Kindle to $189 from $259. In early July, Sony joined the fray by cutting prices for its three e-readers, which now start at $149.99.The Kindle, nook and Sony Reader are all devices that connect to online book stores allowing users to download digital content over a 3G wireless service, Wi-Fi or by downloading from a PC, and feature e-ink screens, which mimic the look of ordinary ink on paper.

Based on market share, Amazon is considered to be the leader in the e-reader race followed by No. 2 Sony, according to Forrester Research, which expects Amazon to sell about 3.5 million Kindles in 2010. The online retailer says that the device is its best selling product, but declines to offer specific sales figures. Barnes & Noble’s nook hit the market for the Christmas 2009 shopping season and the bookseller has promoted the device heavily in its bookstores. Both companies have retail partnerships with the likes of Target and Best Buy. Sony also has a sizeable distribution channel with those same partners.

Meanwhile, a bevy of other upstarts are targeting the e-reader market. Borders rolled out a device called the Kobo this spring, and in June began a promotion that bundles the gadget, priced at $149, with a $20 gift card. News Corp. recently acquired Skiff, a Hearst-owned company that makes its own e-reader which has yet to surface in retail stores. At the time of the sale, News Corp. indicated that its interest was not in the e-reader device itself but in Skiff’s content-delivery platform, which will allow the company to deliver media-rich journalism to tablets, smartphones, e-readers and netbooks.

The elephant in the e-reader market is Apple’s iPad. Experts at Wharton say that the iPad, which has its own bookstore and an interface for reading digital books, reinvented the tablet PC market and forced e-readers into a corner. In the end, multifunction devices like the iPad, which allow users to play games, peruse their e-mail, create presentations and surf the web in addition to reading books, may render e-readers obsolete.

When Amazon introduced the Kindle in 2007, the device was meant to offer an experience that was like reading a book or magazine — nothing more, nothing less. However, it’s unclear that consumers will continue to want a single function device. “Look at the portfolio of things people do with an iPad. They move between web surfing, books and entertainment,” says Peter Fader, a marketing professor at Wharton. “That’s what people want. Book reading is just one slice of what they do. It’s similar to the same way smartphones are taking over regular mobile phones. There’s no need for a phone that just does voice calls.”

According to experts at Wharton, e-readers are at best a niche market and at worst may soon become extinct. The one advantage e-readers have over the iPad is that they can be read easily in daylight due to the e-ink screens. “But how big of a market is that?” asks Fader. Karl Ulrich, an operations and information management professor at Wharton, says the current batch of e-readers has three advantages: high-contrast screens, long battery life and low cost. “However, the more general-purpose tablet computer is going to just keep getting better on those three dimensions,” Ulrich notes. “I bought both the Kindle and the iPad to try them both. I never use the Kindle. The iPad on the other hand is phenomenally useful.”

Indeed, sales figures indicate that e-readers are a niche relative to a device like the iPad. Apple reported recently that it sold three million iPads in 80 days despite prices starting at $499. In January, research firm Yankee Group predicted that e-reader devices would surge only after the price for the devices falls to about $150. The firm estimated that there will be 36 million e-readers in the market in 2013. “It is possible that if e-readers were priced so low that they paid for themselves with the purchase of say five books in digital form, that people might buy them as a third or fourth device,” Ulrich notes. “However, at that point, the devices would be so inexpensive that there would probably not be much money to be made from the hardware.”

The challenge for e-reader players is differentiating themselves from Apple’s iPad while growing market share and avoiding commoditization. Are the likes of Barnes & Noble, Amazon and Sony up to the task? Potentially, but Wharton experts aren’t hopeful. “E-readers will always be a niche product,” notes Don Huesman, director of IT at Wharton. “They do one thing very well.” Although the Kindle cracked open the market by appealing to dedicated readers, “the general purpose device tends to win in the long run,” adds Kendall Whitehouse, director of new media at Wharton.

Niche vs. iPad Clone

Not surprisingly, Amazon CEO Jeff Bezos sees the Kindle as more than just a device — it’s a platform that can be used across multiple gadgets. For instance, Amazon has Kindle apps for the iPad and iPhone as well as the BlackBerry and Google’s Android operating system. The apps synchronize with the main device as users read an e-book. If a consumer leaves his or her Kindle or iPad at home, for example, he or she can pick up the same page while on the road using a mobile phone.

At Amazon’s shareholder meeting May 25, Bezos likened the Kindle to a digital camera. Smartphones have cameras too, but consumers still buy single function devices. “Kindle will compete with these LCD devices like the iPad primarily by being a very focused product,” Bezos said at the meeting. “Serious readers [are] going to want a purpose-built device because it’s an important activity to them. Now, if you look at it in terms of population or percentage of households, 90% of households are not necessarily serious reading households. And so we’re very focused — the Kindle is all about reading.”

Fader doesn’t buy the digital camera analogy because “a camera takes pictures better [than a device built into a phone] and there’s so much more you can do with it,” like shooting video and editing images on the go. “The Kindle is a limited device,” Fader adds. “It’s in the same category as [old-fashioned] buggy whips [for horses]. You won’t see a single kid under 18 with a Kindle.”

In the long run, Clemons thinks it’s unclear whether a single function device can do well in a gadget-overloaded world. His major criticism of e-readers is that they don’t allow consumers to consolidate from several devices to one or two. “In the age of almost free devices, we suffer more from device clutter than from sticker shock.”

Rather than sticking to a niche, the Kindle and other e-readers may eventually become more multifunctional devices with better web browsing, applications and other functions to compete directly with the iPad, say experts at Wharton. But Huesman thinks Amazon is hampered by the Kindle’s e-ink screen, which currently doesn’t offer color text or photos. Bezos has said that he has seen color e-ink screens in the lab, but they aren’t ready for prime time. “E-ink may have potential when the color is working right, but liquid crystal displays [LCD] will continue to evolve as well,” says Huesman. Adds Ulrich: The special-purpose displays of e-readers “are not going to offer enough of an advantage to enough people to sustain the category. The benefits of having a general-purpose mobile computing device are so compelling that I believe few people will carry two devices, and few people will choose to have only an e-reader in lieu of a tablet computer.”

Commodity Devices

Analysts are generally split on the prospects of the Kindle and other e-readers and the motivation behind the recent price cuts. According to Youssef Squali, an analyst at investment firm Jefferies & Co., “The popularity of the iPad is eroding Kindle’s market share, forcing Amazon to cut the price,” and other e-book retailers are similarly feeling the heat. But Sandeep Aggarwal, an analyst at Caris & Co., said in a research note that Amazon still has the best e-reader on the market and that the iPad and Kindle are likely to be targeting two completely different audiences. Aggarwal speculated that Amazon may be clearing out Kindle inventory with price cuts in advance of releasing a new version with more features.

What’s unclear is whether lower prices for e-readers will juice sales by enabling a greater number of consumers to justify the purchase of a single function device. Analysts say it’s likely that both Barnes & Noble as well as Amazon are feeling the heat from the iPad’s scorching sales. Meanwhile, Barnes & Noble has to be aggressive to gain market share on Amazon. “New entrants have the greatest incentive to start a price war,” says Whitehouse. “Barnes & Noble is coming from behind.” Nevertheless, Amazon moved quickly to match Barnes & Noble because “not losing market share is very important to Amazon. It’s not about profit as much as it is market share.”  

The problem with the price war is that e-reader devices may become commodity tools, or devices that are viewed as the same no matter who manufactures it, Fader notes. Moving forward, Fader says there appear to be two options for e-readers: Become a niche market for older consumers and avid readers, or become so cheap to buy that even consumers at the bottom of the food chain will find them appealing. “The price war is a mistake for Amazon,” Fader states. “Amazon risks bifurcating the market [and sending the message that] ‘Some of you want a multifunctional experience so buy an iPad and the rest of you who want books come on over here.’ It’s commoditizing a shrinking market. Amazon may have no choice, but it’s a bad decision.”

If given control of Kindle marketing, Fader’s first move would be to differentiate the device from the iPad. “Amazon has to get to the point where the iPad and Kindle don’t show up in the same sentence,” says Fader. “At this point I’d almost prefer to give it away as part of some Amazon premium reader program. It’s only there to get people to buy stuff from Amazon.” Whitehouse agrees that the ultimate goal for Amazon and Barnes & Noble is to sell content, not e-readers. “E-books are the classic razor blade story.” Whitehouse says. “You buy the reader, but [the retailer] makes the money from [customers buying] e-books.”

Despite the online retailer’s challenges with the Kindle, few experts at Wharton were ready to totally count Amazon out. Amazon could revamp the next-generation Kindle to be more competitive or use the device to reward loyal customers. Barnes & Noble could do the same. Sony also has the distribution and manufacturing heft to endure a price war. Amazon and Sony have other entertainment assets they could combine as options in a tablet to rival Apple’s iPad.

But the future is less than rosy for start-ups looking to challenge the current major players, observers say. Although a bevy of companies paraded new e-reader devices at the Consumer Electronics trade show in January, they note, young companies will struggle with manufacturing costs and fail to recoup their investments if they sell the devices at lower price points. “E-readers may have a role, but these devices from smaller players are toast,” says Huesman.

The Best Ecosystem Wins

Although much of the focus on e-readers centers on the devices themselves, experts say the market leaders have done a good job of contingency planning by building content delivery platforms that can outlast the gadgets themselves. For example, Amazon’s Kindle app that delivers books and magazine content to the iPad and iPhone are popular, and the retailer also offers versions for Research in Motion’s BlackBerry as well as Windows and Macintosh PCs. “Amazon has hedged its bets by providing very good reader applications for a variety of hardware platforms,” Ulrich notes. “I believe the Kindle will wane in importance to Amazon over the next 24 months.” Consumers don’t want content tethered to a single piece of hardware, and, through its app network, “Amazon has done a pretty good job enabling that” by letting users view content on multiple devices, Whitehouse says.

Amazon on June 28 foreshadowed a multimedia future for its Kindle apps. The company detailed a new update for the Kindle Apps for the iPad, iPhone and iPod Touch that can support embedded video and audio clips. The first books to use the new technology are Rick Steves’ London, by Rick Steves, and Together We Cannot Fail, by Terry Golway.

Indeed, Forrester analyst James McQuivey recently predicted that iPad readers are as likely to buy content from Amazon’s Kindle App as from Apple’s iBookstore. Bezos told listeners at Amazon’s shareholder meeting that the retailer aims to make Kindle books portable to any device. Barnes & Noble also has e-commerce and e-reading applications for multiple mobile platforms. Both rivals are forming an ecosystem around digital bookselling. But Fader warns that the two companies should resist trying to beat Apple — which arguably has the tech sector’s strongest ecosystem in the iTunes platform — at its own app game. “Amazon should play to its strength: It is a purveyor of books, digital goods and other products. Pretending to compete with Apple makes Amazon look weak.” More questionable is the fate of Sony, which has a well received e-reader but lacks the e-commerce system of its rivals.

Experts at Wharton say it’s possible that Amazon and other companies could abandon their e-reader devices in a few years if the category implodes. In many respects, they note, the Kindle, nook and similar gadgets have served their purpose by jump-starting the markets for tablet-like devices and digital books. “The world is an uncertain place, especially in the area of mobile computing hardware, so I would not give up on the Kindle,” Ulrich states. “I would bet against its long-term success, but I don’t see any reason for Amazon not to stay with it for another year. Things could play out very differently than I expect.”