Will E-Readers Eat the Tablet Computer?

The consensus prediction in the tech industry is that tablet computer sales will swamp sales of ebook readers. The Huffington Post is taking bets on which e-readers are dead meat (link), and Informa predicts that e-reader sales will start declining in 2014 as tablets out-compete them (link). I've seen similar (and more pessimistic) private forecasts from other analysis firms. They all argue that it's just a matter of time until general-purpose tablet computers displace more limited e-readers.

Yes and no. I think tablet features will eventually take over, but it would be very premature to assume that tablet computer companies will be the long-term winners. They're actually at a huge disadvantage that almost no one is talking about.

What brought this home to me was a brief hands-on experience I had last week with the Barnes & Noble Nook Color. I usually think of Nook as the poor stepchild to Amazon Kindle, and in unit sales it certainly is. But Nook Color isn't just an ebook reader. It's a full tablet computer, or at least it will be if Barnes & Noble allows it to be. And it sells at a great price.

The easiest way to explain my reaction to Nook Color is to compare it to the Samsung Galaxy Tab. The first thing I noticed was basic ergonomics. As I wrote recently, when I first picked up the Galaxy Tab it worried me because it was hard to hold -- its slick plastic surface felt like it was going to slip out of my hand, and so I couldn't hold it comfortably without putting my thumb on the screen (link). The Nook Color is almost identical to the size and weight of the Galaxy Tab, so I expected to have the same problem. But the Nook has a brushed metallic-feeling surface that's much easier to grip. Attention to detail has a huge impact on mobile products, and Nook Color shows far more attention to detail than the Galaxy Tab.

The Galaxy Tab definitely has more features than the Nook: two cameras, 3G options, and an accelerometer. But Nook Color has all the basics, including Android OS, a touchscreen, and very nice color display that I think is the equal of Samsung's. And it has one important feature that The Galaxy Tab lacks -- an affordable price. A Nook Color with WiFi is $249, literally half the price of a similarly-equipped Galaxy Tab.

That's a stunning difference, especially considering that Samsung usually tries to be a price leader in new technologies. At $499, I think the Galaxy Tab will be a very difficult purchase for the average consumer. At $249, Nook Color isn't cheap, but it's a mainstream consumer product.

So how in the world does a book-seller get a 50% price advantage over a major consumer electronics company?

The difference isn't mostly due to features. I bet the accelerometer and cameras in the Galaxy Tab don't add more than $20 to its cost, probably less. The Tab probably has a faster processor as well, but no way does that justify the cost difference. I think two other factors are involved. The first is that B&N owns its own retail stores, and so it doesn't necessarily have to mark up the price of the Nook with the full traditional retail margin. In contrast, Samsung will be expected to fork over the usual 20 points or so of margin to its dealers, plus additional comarketing dollars to buy shelf displays and Sunday newspaper ads. Second, since B&N makes money from the content it sells to Nook users, it can afford to sell the hardware at lower cost.

In other words, the Nook is a subsidized product, like a cellphone. So is Kindle.

I think the people predicting that tablets will swamp e-readers haven't thought through the economics of the situation. As long as e-readers are based on e-ink displays, they can't compete directly with tablets, because the displays are grayscale and are too slow to display animation and video. But an e-reader with an LCD display is physically a tablet, at a much more attractive price.

Subsidized products usually beat unsubsidized ones. Even Apple had to move the iPhone onto subsidies after it first launched it without.

The only thing stopping Nook Color from competing directly with tablets is software. Although Nook Color runs the Android OS, same as Samsung, Barnes & Noble is reportedly planning to severely restrict the applications that will run on Nook Color. The idea is to keep the device focused as an e-reader rather than allowing it to become a general-purpose tablet.

It's unusual for a company to artificially restrict what you can do with a computing product, but there is a perverse logic to what Barnes & Noble is doing. If someone buys Nook Color as a tablet and doesn't buy any books or other content for it, Barnes & Noble will make less money. By restricting the apps, Barnes & Noble can chase away those lower-margin customers who aren't hardcore readers.

But I think that's a very short-sighted policy, for two reasons:

First, as a dedicated e-reader, Nook has important drawbacks. Its battery life is much shorter than an e-ink device, and it's a lot more expensive. If the apps are restricted, Nook Color is a tweener. It's inferior as an e-reader and as a tablet.

Second, B&N is missing a huge opportunity. It's not like they're losing money on Nook Color sales (the hardware cost is probably in the $150 range, or lower). As long as you're making some money per unit, I think it makes sense to grab as many customers as you can now, while you have a structural advantage in the market.

The ultimate payoff for an ebook distributor like B&N is to displace the publishers and start selling ebooks (and other content) directly to the public. To get to that goal, B&N should be trying to grow the e-reader installed base as quickly as possible. Instead of restricting Nook Color to people who already want ebooks, B&N should sell it to everyone and then entice them into becoming e-reading users.

Historically, some of the most successful computing products were sold first as single-purpose devices that then blossomed into multipurpose devices. PCs were first adopted in volume to run spreadsheets, and the first successful PDAs were sold as electronic calendars. Nook Color could be the e-reader that ate the tablet market.

And it's easy to do -- all B&N has to do is say yes to all types of third party apps. Get out of the way, and the customers will take care of the rest.


Anonymous said...

Well I guess they don't want their competitors on their tablet. Little point in selling a bazillion only to find that the Kindle app is the most popular on it!
By all accounts the iBookstore might well be behind the Kindle app on Apple's own platform. Apple don't seem to care since selling hardware is their aim. Doubt that B&N would feel the same.
Might be one of the reasons for the coming Amazon app store. When their own tablet comes out no doubt it won't be open either.

BillSeitz said...

Could also be fear of having people expect to get support for a general tablet from a B&N employee...

Anonymous said...

As someone who owns an iPad and recently bought a Kindle, I think BN is on the right track. What I like about Kindle is it is ONLY a book reader. On the iPad, I never read much because there's so many other tasks calling for my attention: new emails coming in, Words with Friends notifications, news alerts, web browsing I need to do, games to play, movie to watch, actual work to do, etc. When I have Kindle, I can't do anything but read, and I find I'm doing a lot more of that. iPad is far better for shorter and more visual content, like magazines, and I prefer it for technical content and rich PDFs, but Kindle is much better for novels.

Denis Altudov said...

I think Amazon is better positioned to screw with Apple.

Using content to subsidize the device AND the wireless bandwidth is the first piece of the puzzle. If you look at Kindle SDK you will see that app developers are expected to pay for the bandwidth they use. So user will pay their "app" and will not pay for bandwidth separately. This pricing model works better for users as they can clearly see what they pay for, and creates right incentives for developers to reduce bandwidth use.

Second piece of the puzzle is that Amazon owns billing relationship with their Kindle customers and therefore they can collectively bargain on their behalf for cheaper mobile internet bandwidth with telcos. Apple is not in a position to do the same, so in the long run Amazon will have a $200 wireless internet device with free internet, while Apple will have $600 mobile internet devices with $20-$30/mo internet.

All it takes is for Amazon to ship a touch-screen Kindle, and suddenly Apple will find themselves completely priced out of the market. And touchscreens get only cheaper day after day.

I think Amazon is waiting to build up critical mass of Kindle users, hence why they push them so aggressively and yet stay quiet on the number of units sold. Exciting times!

petermillard said...

Kindles and iPads are different devices - I have both. I read novels almost exclusively on my iPad using Kindle app; I use the Kindle when it makes sense to do so e.g. in the garden, on holiday, i.e. where an almost-disposable, lightweight e-ink device is appropriate. If (big if) Amazon manages to produce a colour touch-screen Kindle anytime soon and they make it available globally and at a respectable price, then maybe, just maybe they may have a shot at disrupting the tablet market. But it's a big ask - let's not forget it took Amazon two years just to produce an 'international' Kindle...

For all I hear about the Nook colour (and it all sounds good) ask anyone outside the US and they'll say Barnes and who? Not to labour the point, but the US isn't the world; 95% of the world's population live elsewhere. Six months on after the iPad's launch there are still many countries where it isn't yet available, and yet it's still selling a million units a month - do you really think the Nook / Kindle colour can compete with that anytime soon?

I mean, I hope they can - competition's a wonderful thing - but let's be realistic about our hopes and expectations.

AnkurJ said...

I don't see a problem with B&N "restricting" the Nook - I think perhaps they may be trying to give the product a focus\niche.

The hardest part of trying to be like an iPad is competing with its App Store.

Mike Cane said...

The NookColor has an accelerometer too, by the way.

I agree with you here.

But you didn't go far enough. B&N restricts its customer base in another way, one that I think severely wounds them:

Barnes & Noble: Drop Your Damn Mutant DRM!

Barnes & Noble could release a "Nook Tablet." It could be the same as the NookColor, only open, and charge $50 more for it. That'd take the hassle and uncertainty and jeopardy out of people rooting it.

I think all eBook devices should also contain a camera to scan a book's barcode. Asking people to typing a title or name on a touchscreen is friction. Barcode lookup to instantly find the eBook version and would help sales, I think. Barnes & Noble would be at a big advantage with that too.

Razavian said...

This is like comparing apples to oranges. E-ink offers a completely different reading experience. I know some people can, but I simply cannot read a book on the iPad.

Online Mobile Recharge said...

Nice post.I think BN is on the right track. What I like about Kindle is it is ONLY a book reader. On the iPad, I never read much because there's so many other tasks calling for my attention.