Economics 205 Final Project
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Economics 205 Final Project Market Analysis – Price War of E-book Readers
Managerial Economics November 25, 2011 Submitted to Dr. Pascal Courty
Martin Nikleva Drew Glover Matthew Grimm Hayden Bally 2
Market Introduction
The idea of an electronic book is nearly forty years old, originating with Michael S. Hart in 1971; however, the drastic increase in demand as well as the technological developments of the e-reader over the last decade has triggered a fierce price war. Sony was one of the first major companies to enter the e-book market with the US release of its “PRS-500” e-reader in September of 2006. The device was sold exclusively at Borders during 2006 for a price of $329. The present E-Book Reader market is an oligopoly as three innovative yet homogenous readers and one reader with much greater functionality control the market.
The first dominant player to gain considerable market share was Amazon after acquiring French technology company Mobipocket which had specialized in e-reader software and personal digital assistants, with the release of the 2007 Amazon Kindle for $399US. This e-book reader struck immediate success selling out its entire supply within hours and forever changing this evolving market. The next entry was the Barnes & Noble Nook debuting to consumers for $159US as an early Christmas present on November 22, 2009 before increasing its price to $259US in the New Year. In 2010 two new players emerged that drastically changed the outlook of the market and set the stage for the current price war. The functional Kobo by Kobo Books was released in May of 2010 with the “lowest price … ever at $149[US]” (Evans). Just prior to the Kobo release, Apple grasped considerable market share in April 2010 with the versatile iPad retailing at $499. The iPad is capable of reading Kindle, Nook, and Kobo material while holding functions comparable to a netbook, therefore creating a new consumer segment. The iPad set technological precedents which are forcing firms to play catch-up while the Kobo marked the cheapest available substitute to date. The Kindle, Kobo, and Nook have been forced to refine their products to compete with these new entrants.
Cost Structure
Cost structure amongst the independent firms can be broken down to similar categories. Production assembly consists of an identical battery, Wi-Fi chip and processor all installed inside a case and body which add up to a fixed cost of roughly $100US. From a variable standpoint, costs include multiple sizes of display screens that are outsourced from LG Display, Innolux and E Ink which is the monopolist manufacturer for the three homogeneous readers. Furthermore, internal memories range from 16GB to 64GB, and additional expansion slots for microSD memory create variable costs in determining unit quantity per each size of memory. To obtain a larger segment of consumers the utilization of expansion slots provides greater incentive to make an immediate purchase due to uniform device pricing. 3
The strategic implementation of barriers to entry has discouraged new entrants. Through implementing branded e-book stores, unfamiliar entrants are forced to invest in creation of their own stores but do not have the same industry power as a dominant player in the book industry like Amazon. iRex Technologies has been recently forced to file for bankruptcy while Plastic Logic has been delaying their e-reader release and industry analysts speculate it will scrap the entire project before launching their product to consumers. These less known companies struggle to enter this market as learning economies have shown that “money is not made on … hardware, but on the paid content and other products it plans to sell to the consumer” (Falcone) after the hardware is purchased. Amazon was able to enter this market because of an accumulation of experience and knowledge the company had gained through its online book service.
Demand Determinants
When purchasing an E-Book Reader decisions are based on user preference, product functionality, and more increasingly product reviews made accessible by the internet. Prices play a significant role in differentiating segments of buyers. For instance, with struggling sales the HP Touchpad release date price dropped (75%) to $99US where it stole market share for a brief moment as the firm entered and promptly exited the industry selling the last batch of Touchpads on September 2nd, 2011. Secondly, the introduction of the iPad to the price war of E-Book Readers made drastic changes in revenue as Amazon basically eliminated profit margin from their readers putting more emphasis on e-book marketing for revenue. Finally, most experts will agree that Kindle, Kobo, and Nook take precedent if the intent is strictly reading, but for more versatility the transition to a tablet such as the iPad, or any one of the growing number of Android tablets, would be preferred by the more innovative consumer.
Strategic Analysis
We can equate the current price war to the prisoner’s dilemma of Game Theory economics. The considerable drop in prices of e-readers can be viewed as a negative sum game as all participants have ended up worse off through lowering their prices. Amazon experienced great demand while keeping their price quite high but as new entrants entered the market with cheap prices Amazon was forced to strike back with their own price reductions, seen today as the new Kindle Fire is produced at a loss of $2.71US (Acharjee). Exemplifying these strategies, in 2010 Barnes and Noble debuted their newest e-book without 3G connection; forcing users to use WiFi to download material, allowing the model to be affordably retailed for $149. Simultaneously they dropped their old 3G model from $259 down to $199. In direct response Amazon dropped the price of its Kindle 2 E-Book reader by $70 on the same day, bringing its price to $189. This was the third price cut by Amazon in 2010 as prices originated at $349 dropping to $189. In April 2010, Amazon offered their normal Kindle for $139. To make their product more competitive 4 they added the option of having advertisements run on your reader reducing price to $114. Continued use of lowering prices as a dominant strategy has been seen for firms producing e- readers as they mistakenly hope this will increase market share.
Market Potential
Though the future of the e-book reader price war is largely unknown as this competitive technological sector is very variable, we can predict its potential direction, taking into account previous strategic moves. Common in adoption of new technologies, consumers have participated in a Coordination Game. As no firm has yet clearly dominated the market, there is much competition as dramatic incentives are offered to attract customers to their particular platform (Bartash). The motives of these firms are to gain significant market share so mass adoption of their platform is gained, ensuring future sales and high payoffs. Firms wish for consumer coordination of their brand because currently some potential consumers have elected not to enter the e-book market in fear the technology they choose will become obsolete. This keeps payoffs relatively low for major firms as missed opportunities of universal adoption are seen. Positive network externalities will be felt by consumers when mass adoption occurs. If consumers coordinate in their purchasing decisions greater consumer entry will be promoted into the market and consumers will benefit from sharing material and a dominant e-book store. An example of a market segment that would benefit from mass adoption of one platform would be educators (Abram). Stephen Abram, vice president of strategic partnerships and markets for Gale Cengage Learning states “As educators, we wish there could be just one ebook standard” (Abram). It can be expected that competing platforms will continue to produce new models at a rapid pace. These models have seen to be exponentially decreasing in price after originally trying to compete at tablet prices where Apple’s iPad dominates, instead of the more affordable e-book prices seen today (Bartash). Most interestingly, competition seems to be transferring from the platform itself to the electronic bookstore. Google, on December 6, 2010, launched their own e- book store compatible with all readers as rumours gain momentum that they will enter into this fierce market with their popular android platform, having already gained popularity with an easy to use online bookstore. Consumer’s loyalty is hoped to be built through these stores as consumers will be less willing to substitute for other brands once invested in a particular store.
Slim profit margins and equal technological advances drive growing unrest in the market. Since colluding to keep prices high is illegal, to break out of this fierce price war firms may attempt to signal to their competitors that stable prices will benefit all parties in the industry by keeping profit margins larger. This may be implemented through an established public announcement. By making a credible signal the firm will deter competition from cheating and it will be evident that payoffs for the firms will be lower as further price matching deteriorates profits and would be 5 costly. The announcing company could ensure credibility by publically invest funds into the announcement by creating extensive print ads guaranteeing price matching ensuring that reduced prices would make everyone worse off. Firms are also seen to be attempting to instil value in their particular brand by enhancing their e-book store services and enhancing customer service by offering their readers through exclusive retailers.
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Works Cited
Abram, Stephen. “Ebooks Part 2: Trends and Standards.” Multimedia & Internet@schools 17.4 (2010): 24-27. Academic Search Premier. November 19, 2011.
Acharjee, Joyanta. “Amazon sells Kindle Fire at a loss to compete in tablet market.” Proactive Investors. November 18, 2011. November 22, 2011.
Bartash, Jeffry. “Price war, iPad rapidly reshaping young e-book market.” Market Watch. July 1, 2010. November 15, 2011
Evans, Joel. “Kobo prices eReader Device at $149—let the competition begin” ZDnet. March 25, 2010. November 16, 2011
Falcone, John. “Kindle Vs. Nook. Vs. iPad: which e-book reader should you buy?” Cnet. November 23, 2011. November 23, 2011. November 23, 2011
McLeod, Gord. “Kindle With Special Offers Lowers the Barrier to eBook Entry Even Further.” Geek Beat. April 13, 2011. November 15, 2011.
Panzarino, Matthew. “How Apple won the ebook pricing war by strong-arming Amazon” TheNextWeb. October 26, 2011. November 16, 2011
Parrish, Kevin. Rim Drops PlayBook’s Price (Production?) After Kindle Fire.” tom’s Guides, September 29, 2011. November 15, 2011.
Suroweicki, James. “Priced To Go.” The New Yorker. November 9, 2009. November 15, 2011.
Tabini, Marco. “E-Book Reader Price War.” Macworld 27.9 (2010): 61. Business Source Complete. Web. 1Nov. 2011. Takahashi, Dean. “E-book reader sales are tripling every years” VentureBeat. August 17, 2011. November 15, 2011
Walkenbach, John. “Kindle Price History” J-Walk Blog. September 28, 2011. November 17, 2011