October 19, 2009 / 12:51 AM / 9 years ago

Amazon's Kindle secure, for now, in e-reader wars

By Alexandria Sage - Analysis

SAN FRANCISCO (Reuters) - The dominance enjoyed by Amazon.com Inc’s (AMZN.O) Kindle faces its first major test this holiday season, but industry experts say only a real technological leap will pose a threat.

Barnes & Noble Inc (BKS.N) is expected to unveil its own branded electronic book reader on Tuesday with a hybrid model that incorporates a reading screen similar to the Kindle’s white and gray display, with a second touch-screen display that makes browsing easier.

The bookseller’s main advantage could be in its physical stores where users will be able to test out the device. A disadvantage may be its as-yet unknown price, which some say will be higher than the Kindle’s recently lowered $259.

Barnes & Noble has not confirmed its e-reader plans.

But the market — arguably built by Amazon — is getting crowded, with e-readers in the pipeline from a spin-off of Royal Philips Electronics (PHG.AS) called iRex Technologies, Taiwan’s Asustek (2357.TW), Plastic Logic and a Hearst-backed venture called FirstPaper. They would share the space with Interead’s “Cool-er,” the Cybook OPUS from Bookeen and others.

“It takes one person to prove this is a very viable business model and as soon as that is proven you have a lot of people ... who jump in,” said Mukul Krishna, global director for digital media at consultancy Frost & Sullivan, adding that the best time to enter the market is ahead of the holidays.

“Amazon has done exactly that with the Kindle. They’ve caught everyone’s imagination,” Krishna said.

E-reader hype has hit a peak in the past month, as Amazon rolled out the Kindle internationally and the world’s biggest Web players and publishers began to mobilize.

Google Inc (GOOG.O) unveiled plans for an online e-book store, while News Corp’s (NWSA.O) Rupert Murdoch visited Japan and South Korea to size up e-reader technology. But Amazon is expected to retain its first-mover advantage.

“Amazon really controls the digital shelves right now,” said Mark Coker, founder of e-book publisher Smashwords. He cited the Kindle’s locked-in customers, who must buy e-books exclusively from Amazon that can then only be read on their Kindles or on Apple Inc’s (AAPL.O) iPhone or iPod Touch.

“I think everyone realizes Amazon got it completely right. They are way ahead of the curve,” he said.

Some 3 million e-readers are expected to be sold in the United States this year, with sales doubling in 2010, according to Forrester Research.

Amazon does not provide data on Kindle sales, but investors will be eager to learn of its progress when the online retailer releases results on Thursday.

DIGITALLY SHARING

Analysts say the larger — but not unsurmountable — threat to Amazon could come from demand for an open system in which e-books bought from various sources can be shared on multiple devices.

As one recent blog comment on www.gizmodo.com, which posted what it said were photos of the Barnes & Noble device, said: “The only thing I’m concerned about is the apparent splintering of the potential e-book market into many armed camps, none of whom will play well with another.”

Sony Corp (6758.T)and others are pushing for a format called e-Pub that would do away with the digital rights management (DRM) issues found in closed systems like the Kindle’s.

The threat to Amazon, according to NPD Group analyst Ross Rubin, “is driven not so much by any particular competitors as it is by having a fractured market or wider interoperability and having those standards take off.”

As Coker explained: “That’s a potential ticking time bomb for any DRM system tied to a specific device.”

“When you’re in a near-monopolistic position, it’s advantageous to have a closed system,” Coker said. “Amazon is in a very powerful position in the industry right now, but monopolies don’t last forever.”

The market will also see what Frost & Sullivan’s Krishna called musical chairs, with rivals jockeying to be the first to add graphically richer displays.

Amazon needs to skillfully balance price and functionality as the Kindle is adopted on a mass scale to embrace new users without alienating its core readers, he said.

“Many who are trying to unseat the most visible incumbent will try to be as creative as possible, especially in pricing, to create a dent in Amazon market share,” said Krishna.

Although Amazon should be able to enjoy the fruits of its proprietary system for the foreseeable future, given the still vastly untapped market and its strong relationship with publishers, it is likely to be quick to adapt when required.

“The day that consumers shout loudly enough, I’m sure Amazon will react quickly,” said Coker.

Reporting by Alexandria Sage; Editing by Michele Gershberg and Steve Orlofsky

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