A price war heated up the digital book world yesterday, as both Barnes & Noble (BKS) and Amazon (AMZN) slashed prices on their e-reader devices. B&N was first, dropping the Nook 3G price from $259 to $199 and adding a WiFi-only device for sale at just $149. Amazon followed suit, undercutting the Nook price by $10 to $189, down from the earlier $259 price.

B&N is thought to have had summer reading promotions in mind as the rational for their price cut, while Amazon, through a spokesperson, declined to offer any reason whatsoever, though speculation abounds that a new edition of the Kindle will be available in the next month or two. But the cheapening of the single-use e-reading device to under $200 no doubt had a lot to do with the phenomenal success of the $499-and-up iPad (AAPL), with more than 3 million copies sold to date and many millions more expected to sell by the end of 2010.

Just six months ago, such e-reading devices, which rely on black & white e-Ink displays, were all over the place, taking up an entire section at the Consumer Electronics Expo. Now the field's shrinking one by one: iRex Technologies filed for Chapter 11 bankruptcy protection in the Netherlands. Plastic Logic still hasn't announced a shipping date for its business oriented (and pricey) e-reader Que; Hearst sold off its Skiff e-reading platform to News Corp (NWS), which has all but pulled the plug on the device.

The 'Razor-World Model' of Pricing


A $189 Kindle or a $149 Nook Wi-Fi looks a lot more attractive when compared to the Kobo e-reader, a $149 device that Borders (BGP) has just started selling in stores and which does not have Wi-Fi or 3G capability. (The company did not respond to requests for comment.) And what of poor Sony (SNE), first out of the e-reader gate in 2006? As The New York Times' Brad Stone explained, "[Sony] has fallen behind its rivals because it lacks Amazon's online sales prowess and Barnes & Noble's physical retail presence." And the only Internet-connected device the company offers, the Daily Edition, is priced at $349; it's now little more than the gangly wallflower of e-readers.

The Nook and Kindle bargain prices should stay that way at least throughout the summer, but not for much longer. With e-book sales already accounting for anywhere from 4% to 8% of business for big publishers, cheap e-readers and the iPad's success portends an e-book sales bonanza, which had Forrester Research's James McQuivey bringing up an old-school marketing model to The Wall Street Journal: "Now they can go to the old razor-world model of giving away the razor for free and selling the blades. They are starting to give away the e-reader."

In other words, it's increasingly clear how the single-function e-reader is a big, money-making trojan horse for Amazon, B&N, and eventually Google (GOOG). The real cash will come through e-book sales, available on every device, anytime you want, albeit with a major caveat: the pesky digital rights management issue that frustrates consumers to no end and. And if e-reader prices drop lower and lower, to the point where it might be more practical to give them away with the purchase of e-books or unrelated items, those e-book prices will stand out, and not necessarily in a good way.

The agency model, which now has retailers taking a 30% commission of e-book list price, means Amazon and B&N make money on e-sales. But a super cheap or free e-reader may exacerbate consumer frustration about DRM and pricing even further and drive down e-book prices, no matter what publishers hope. There's little they can do as retailers battle it out over low prices, but it's hard not to think of the Great Video Game Crash of 1983 --which marked the end of the first game console craze -- and see the same mistakes being made again.

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