War of Words

By Ben Thompson, Senior Editor

The emerging e-reader market has given both device manufacturers and content providers a much-needed boost over the last few years. But as the battle for readers’ eyeballs heats up, what direction will the sector take next?

“Competitors will attack Amazon’s market position by launching new features, expanding content beyond books, dominating markets outside the US, reducing costs and improving relationships with publishers”

If the buzz generated at this year's Consumer Electronics Show in Las Vegas ¬- the technology industry's premier showcase for parading new product ideas - is any gauge of market health, then the burgeoning e-book sector is booming right now. Electronics vendors and device-makers alike were jostling for floorspace at the industry-leading event, as firms looked to capitalize on the stellar success of Amazon's Kindle in transforming e-readers into what one commentator called "the thinking-person's iPod".

Barely a day goes by without an announcement of a new device release or acquisition; at CES alone the industry witnessed the unveiling of the Orizon from Bookeen, the RCA Lexi, the iRiver Story, the Jinke SiPix readers, the Hanvon WISEreader, the Cool-er readers from Interead, the Ocean and Tidal series from Copia, and a pair of E6 and E10 e-book readers from industry heavyweight Samsung. And these are just the most interesting of the dozens of new devices on show, all of which hope to earn the tag of ‘Kindle killer' and capture a share of the rapidly expanding digital reader market.

In fact, the interest in e-readers, or e-books as they are called now, has reached fever pitch. Amazon CEO Jeff Bezos fielded nothing but Kindle questions at the company's most recent shareholder meeting, while last summer Prime View picked up E Ink, the company that supplies the screen to the Kindle, for a mouth-watering $215 million. And heavyweight companies ranging from electronics giants like Sony and Fujitsu to booksellers like Barnes & Noble are aiming to upset Amazon's early advantage.

One of this year's most eagerly anticipated releases is the QUE reader from Mountain View, California-based Plastic Logic, which claims to be the first e-reader device specifically targeted at the business community. "The thing that really differentiates our product is the fact that, from the ground up, we've designed it for business users," says Plastic Logic Chief Executive Richard Archuleta. "We started out by looking at how business people use paper, and we found that a huge majority of people print things out to read and study them rather than read them electronically - even if those documents are already in electronic format. So we spent a good amount of time trying to understand whether there was a need there that could be met with an electronic device that would read like paper, and could essentially replace the paper that business people had. And we believe that there is."

Up until now, digital juggernaut Amazon.com - leveraging its position as a dominant book retailer - has catalyzed the market for e-books. But Forrester Research Analyst Sarah Rotman Epps believes that this is just the beginning of the e-reader revolution. "Competitors will attack Amazon's market position by launching new features, expanding content beyond books, dominating markets outside the US, reducing costs and improving relationships with publishers," she suggests.

All of which plays into Plastic Logic's hands. "We didn't try to create an e-book reader, and we weren't trying to create something that was just primarily an e-mail client either," explains Archuleta. "We were trying to come up with a new class of product that would actually lighten the load for business people, so that they didn't have to carry paper with them all the time. Corporations use paper for a number of different purposes - take people in sales force automation programs where they always need access to the latest price sheets and catalogues, for example. To be able to always have those with you on a very thin, very light device that you can carry around and that gets updated all the time because it's always connected to the internet is very empowering. There are also a number of vertical markets - healthcare, for example - where there's a lot of application for a device like this; the military is very interested in it too, for everything from in-field use to classroom training."

Archuleta cites one client - a large airplane manufacturer - that expressed an interest in using the device to empower its service personnel, many of whom need to crawl around inside aircraft fuselages to conduct inspections and other maintenance work. "They need access to big stacks of documents, and right now they might use a laptop or a tablet PC, but if they could have something that was one third or less the weight of what they currently have, it would really make their jobs a lot easier," he says.

Another significant area of market growth will be in the emerging e-textbook market. "The education market is a big one for us in the future," says Archuleta. "The technology we've developed with the display allows us to go into a number of different markets and to position electronic reading devices for different purposes."

Forrester agrees that this sector could prove lucrative for device-makers, but suggests that the drivers for growth could come from a surprising source. "The textbook tipping point won't come from Harvard, MIT or even Stanford," says Epps. "We think it will come from developing nations like China and India, whose universities will use technology to leapfrog ahead of Western counterparts. China is already a fast-growing market for e-readers like Jinke Electronics' HanLin eBook, which sells for $299 and includes 600 free books. We expect the textbook e-reader market to start this year with modest sales of content through the Kindle DX, with greater adoption starting in 2011 and reaching more sizable numbers by 2013."

She feels that while frequent book readers drive device and content sales today, the next five years will see an explosion of the e-reader textbook market, and in 10 years, the market will be driven by businesses going green in government, education, health and other sectors. "With retailers, mobile operators and device manufacturers all vying for a piece of the e-reader action," she says, "publishers should proactively shape their own e-reader opportunity - or miss their last best chance to control their own destiny." Indeed, the 2010 e-reader story is likely to extend way beyond just e-books and include newspapers and magazines augmented with audio and full-color animations, video and imagery. Establishing partnerships with publishers and other content providers will be key for device-makers going forward.

Of course, the big question for everyone in the market is whether the next-generation e-book reader will prove to be dead on arrival thanks to the Apple iPad and the advent of its slate tablet PC siblings. Apple's latest addition to its product family generated unprecedented excitement prior to its announcement earlier this year, but many commentators remain skeptical as to which market category it will fall into.

Archuleta, for one, doesn't see the iPad as a direct competitor. "To be honest, we don't see it as much of a threat," he says. "The user interface that we've developed, which is unlike anything else in the market, is really designed for how business people work, and how they manage their documents is something that's a huge differentiator for us. And even though the iPad's not on the market yet, it'll be interesting to see how it evolves over time, because right now it's very close to a laptop in a lot of its capabilities, and the business users we talked to aren't necessarily looking for a product to replace their laptop. The customers we're targeting have both a smartphone and a laptop, and what we find is our product is really designed to replace the paper that they have in addition to that, rather than those devices themselves."

And he's not the only one bullish about the future for e-readers. Glen Burchers, Consumer Marketing Director for chipmaker Freescale Semiconductor, predicts that the e-reader market will continue to grow over the next few years regardless of the impact of the iPad. "For the average e-reader customer, leisure reading is the primary leisure activity, before TV, before the internet," he says. "The average e-reader customer is 47 years old, makes $75,000 a year and reads two books per month. But the tablet market consumer is much different: their primary function is web surfing. The typical web user is younger: student age, and not into leisure reading. The average American teen is online 35 hours per week. They're on their phone 30 minutes per day. They need a bigger screen device. These are two different markets."

Nonetheless, a ChangeWave survey of 3171 consumers - conducted in the aftermath of the Apple iPad announcement - shows a huge wave of pre-launch demand for the device and offers key evidence that the Apple tablet will have a major impact on the e-reader, laptop and home-entertainment markets going forward. Among consumers who already own an e-book reader, the Amazon Kindle (68 percent) towers over its closest rival, the Sony Reader (10 percent). But to gauge the potential impact of the iPad on this market, ChangeWave asked e-reader owners whether they would have purchased their current e-reader if the Apple iPad had also been available. While nearly half said they would have still bought their same device, better than one in four report they'd have bought the Apple iPad if it had been available at the time of purchase. The survey suggests that the iPad is now poised to capture an astonishing 40 percent of the e-reader market going forward in the first 90 days after its launch.

Companies like Amazon, Barnes & Noble and Sony aren't standing still. Analysts say they're planning major facelifts this year for popular e-readers including the Kindle and the Nook. Some of the changes may include switching to color touchscreen technology and making the devices more durable. A big selling point for Plastic Logic is that its device is made primarily of (you guessed it) plastic. "Our current display in the QUE Reader has over a million transistors in it, and all those transistors are made out of plastic," explains Archuleta. Not only does this have obvious benefits in terms of making the device more robust for the user (a major criticism of the current generation of e-readers - and indeed, of the Apple iPad - has been their reliance on breakable glass screens), it also simplifies the manufacturing process significantly. "With silicon, it takes about three weeks from when the material goes into the factory until you can build the display. But with our process, it's just a few days, which offers significant benefits."

Even so, many commentators believe it is inevitable that the e-reader market will be severely impacted by Apple's involvement, if for no other reason that the company has an uncanny knack of convincing otherwise sane and rational people that their products are must-have accessories for digital living - even if their use is not entirely clear. "Do I want an iPad as a replacement for my MacBook Pro?" tweeted MacFormat magazine's usually sane and rational Chris Phinn. "No. Do I want one as a replacement for my iPhone? No. Do I want one? Yes." Whether consumers will be willing to shell out for both a standalone e-reader device and an iPad remains to be seen. It is this force - the irrational power of desirability - that could prove to be the biggest hurdle for e-readers going forward.