E-readers: Can the Kindle avoid repeating the video-game crash of '83?

This holiday season's must-have gift is, of course, the electronic reader, and the public's craving evokes the Tickle Me Elmo and Furby bubbles of Christmases past. Amazon's (AMZN) optimism remains on high after reporting that Kindle sales in November were the "best" ever, making the online retailer's e-reader its no. 1 product.

Barnes & Noble's (BKS) e-reader, nook, hasn't been sighted in the wild, but recent eBay (EBAY) auctions illustrate how demand is far exceeding supply. (Worse for B&N, the nook's shipping date keeps sliding into the future.) Sony (SNE), too, expects big sales for its e-readers. All of which bolsters Forrester Research's prediction of big e-reader sales for the holidays -- and up to 10 million in 2010.
Will E-Readers Disappear?

Consumers aren't lacking in choice for the e-reading gadget of their dreams, and more options should be on the market this time next year: Plastic Logic's business-minded Que, color e-readers like the Pixel Q1, a long-rumored Apple (AAPL) Tablet, and new Kindles (and textbook-oriented Kindle DXs).

But is the e-reader's time really now? Or will consumers make a choice that they'll bitterly regret 12 months from now, making the entire e-reader market disappear?

Consumers who buy electronic devices always take the risk that the device will quickly become obsolete. E-readers are no exception; Amazon introduced the Kindle two years ago, and it unveiled the Kindle 2 in February with enough advancements to make Kindle 1 owners grumble about their purchases. The only way to upgrade Kindle 1 firmware was to buy a Kindle 2.

Frustrated Shoppers

Another deterrent for e-reader shoppers is the lack of a standard format. Kindle e-books can only be read on the Kindle (or associated programs for the iPhone and PC), and the nook's e-books can't be transferred to other devices, either. (They can be shared between nook users -- in a one-time transaction, with a two-week deadline.) Sony makes it easier for customers to read their e-books on the device of their choice, but the transition isn't always smooth.

Consumers who upgrade or switch devices and lose access to their e-libraries undoubtedly find the experience infuriating. And those who advocate for a standardized format, like ePub, may be deterred if Kindle maintains its market dominance and keeps its system closed.

The Wall Street Journal cautioned that e-readers may not be enjoying an iPod moment but an "eight-track moment." It's an appropriate comparison, but savvy shoppers should heed even more the Great Video Game Crash of 1983. The parallels between 1983 and now are striking: deep recession, high unemployment, the culminations of technological revolutions -- personal computers then, smartphones and netbooks now.

The Video-Game Bubble

By 1983, video games had been around for a decade, but their second generation, in the early 1980s, flooded the market with consoles and hastily produced games. Consumers could choose between the Atari 2600, the ColecoVision, the Magnavox Odyssey, and many other similar hardware systems whose games could only be played on that model. With so many devices on the market -- and overhyped games, like E.T: The Extra-Terrestrial, whose sales did not live up to expectations -- consumers had little to distinguish among consoles, or to choose one over another.

Price also factored heavily into the video game crash: as consoles were glutting the shelves, personal-computer prices were plunging. A console designed only for games cost a few hundred dollars, but the $499 Commodore 64 could play games (with sound and color) and had enough memory and storage for word processing and home accounting. A budget computer, the $199 Vic-20, was marketed with the tagline, "Why buy just a video game?"

With so many options, it was inevitable that retailers would mark down video games and consoles considerably. Unfortunately for their marketers, those massive price cuts came as hardware and development costs skyrocketed. Throughout 1983, Atari was losing $2 million a day. Eventually, companies like MagnaVox and Coleco got out of the industry entirely, smaller outfits went bankrupt, and this promising and exciting new industry virtually disappeared in North America until Nintendo's (NTDOY) NES hit the market in 1987.

Avoiding the Pitfalls

Looking to 2010, it's hard not to see further parallels to 1983, as digital books blogger Mike Cane pointed out last summer. Replace "console" with "e-reader," "personal computer" with "smartphone" or "netbook," and consider the multiple noncompatible formats. Price, too, will be a major factor: Should you pay $259 for a Kindle 2 or a nook, or pay a little more to get an iPhone or Google's G1? Or maybe shell out an extra $50 for a tricked-out netbook? Or another $100 on top of that for a laptop that handles e-reading -- and so much more?

For now, Amazon still has the advantage. The Kindle, after all, is available in time for Christmas, while the nook increasingly looks like it won't -- and Sony may race across the finish line very late this year, possibly too late for impatient holiday shoppers. But with so many competitors already in play, or about to be, Amazon needs to keep Kindle ahead of everyone else. If it can't, then the device -- and the e-reader market -- may become the next consumer bubble.

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