War on E-readers: Amazon discounts Kindle by 27%, one-ups Nook price drop

Amazon announced today that it is dropping the price of its Kindle electronic reader from $259 to $189, effective immediately. We anticipate the price on Kindles for sale at 1,740 Target stores will also drop to $189, although neither Amazon nor Target has returned calls to confirm this yet.
Update: Target has confirmed that it will sell the Kindle for $189.

Amazon is no doubt reacting to an announcement today by Barnes and Noble that it is dropping the price of its Nook 3G reader to $199. The Nook 3G and the Kindle share the same feature of a cellular connection to the Internet, the cost of which is included in the initial purchase price.

Both readers are competing with the new bully on the block, Apple's iPad. With more than 2 million of the colorful, app-laden iPads sold, the black-and-white e-readers need a market advantage to offset the capabilities gap. Apparently, both Amazon and Barnes and Noble think that price could be that differentiator.

Last year, iSuppli did a tear-down and analysis of the Kindle and estimated it cost $185.49 to build, so Amazon's pricing could well reflect its cost without any net. If this is true, any margin that Target would realize in selling this device must come from Amazon's coffers, and Amazon must be betting that it will make up the difference in book sales.