The coming eReader apocalypse

Happy B'ak'tun 13.0.0.0, Haab 3 Kankin, Tzolkin 4 Ahau everyone. Most of us all woke up this morning and the world was still here. Fancy that! No Mayan apocalypse! Yay!

My ZDNet colleagues Adrian Kingsley-Hughes and Matt Miller engaged in a Great Debate this week over the future of eReader devices. Rachel King, the presiding moderator, rendered her judgment: eReaders will live on, at least for the time being.

While I agree that there is still some time left for the traditional e-Ink based device and the Amazon Kindle as well as the NOOK should sell quite well this holiday season, that time is limited.

Over the years I have made dire predictions for the future of dedicated eReader technology. The last time I visited this subject was back in July of 2010, where I said that a "zero margin" situation would eventually come to pass where manufacturers of such devices would have to sell them at no profit margin or even below actual manufacturing and marketing cost.

At the time when I wrote that article, the Amazon Kindle and the comparable Barnes & Noble NOOK were selling for $139.00 each.

Today, nearly two and a half years after writing that piece, the base-level subsidized Kindle with Special Offers is selling for $69.00 and the equivalent NOOK is $79.00.

Clearly, both of these devices have reached a zero-margin or below manufacturing cost go to market price for both of these companies. Obviously, both companies still have been able to justify selling them at that price point, by taking losses on the hardware and making money on the content.

Since I wrote that July 2010 piece, both companies have since diversified into tablet computers as well, and that is clearly the future direction for both the Kindle and NOOK product line.

Obviously, if Amazon and Barnes & Noble are continuing to offer traditional eReader devices along with their tablets, there must still be a business justification for keeping these products alive, or they wouldn't continue to offer them.

[Disclaimer: My employer, Microsoft, is an investor in Barnes & Noble's NOOK Media LLC subsidiary. My opinions in this article do not reflect those of my employer.]

I think the real question is "how long." That is, when does this stop becoming profitable?

From a consumer perspective there are still clear cut reasons why you want to use a traditional eReader device over a tablet: Device Cost, Readability, Battery Life and Weight, in that order of importance. As long as these drivers are in place, it still makes sense for Amazon and B&N to make regular eReader devices.

Today, the cheapest tablet computers that are sold by both of the primary eReader players are the original 7" Amazon Kindle Fire at $159.00 and the 7" NOOK HD at $199.00. Google's entry-level Nexus 7 is also $199. 

There are of course more expensive and more feature-equipped models from all three of these companies, but these are the loss leader tablet devices.

The first thing which has to happen is for the loss-leader 7" inch tablet prices to collapse. While $159 and $199 seems extremely inexpensive for a tablet computer, that's still more than twice the price of the cheapest regular Kindle device. So there's a bit more room for tablet prices to drop.

I beleive that sometime in the next two years, we will see 7" tablet prices drop to $99.00. I can't say for sure who is going to achieve it first, but this is virtually guaranteed to happen.

A lot of this is going to come about as a result of overall component integration, economies of scale, and the continued development of ARM-based Systems on a Chip by companies such as Samsung.

I have no doubt that an SoC for low-end tablets can be designed that contains a 1Ghz dual-core processor, 1GB of RAM, and a fairly decent GPU which will cost half that of which exists today.  

Small HD (720p or greater) 7" displays will also be made that will cost approximately half of what they do today to manufacture. 

In fact, if we look at a comparable Bill of Materials for Kindle Fire HD and the Nexus 7 as of July 2012, it would be easy to see how we could end up with a $80 all-inclusive BOM+Manufacturing cost for the same list of components sometime in 2014.

You could argue of course that it might be possible to get traditional eReader devices even cheaper as well.

However, there's one problem with this and it has to do with the fact that we've probably reached the practical limits as to how much more simplified we can get the components on those devices to be -- they already run on low-power, cheap microcontrollers with few components to begin with, and the margin on these products is already zero.

Additionally, the largest part of the component cost on eReaders is from the display, which comes from a single supplier, the E Ink corporation.

At $100 per device, most consumers would probably opt to use a 7" tablet instead of an eReader. I'm going to take a guess here, but that is probably going to result in the displacement of 80 or 90 percent of Amazon and Barnes & Noble's traditional eReader businesses.

If only 10 or 20 percent of your customers still want the old-school E Ink devices, does it really make business sense anymore to continue producing them?

If you can't place orders in the kind of volume like you used to with your contract manufacturers, can you still price it at $69.00 and can the Chinese manufacturer still guarantee a unit cost of $69.00 so you break even or only slightly lose money on the device, like they do now?

Hard to say. I'm going to guess no.

[UPDATE 12/22/12: In a report released on December 10 by component research firm IHS iSuppli, eReader shipments fell to 14.9 million units in CY 2012 — which is a decline of 36% from 2011’s 23.2 million units shipped. eReader shipments actually grew the largest from 2010 to 2011.]

So while it's true that a small, dedicated group of consumers may still prefer the black and white eReader device, and that they are easier to read (for the time being) and have better battery life than 7" tablets, the economies of the business will likely spell an end for the E Ink-based stuff.

Will the traditional eReader device survive the next two years, or will even cheaper 7" tablets shuffle them off this mortal coil?  Talk Back and Let Me Know.