Amazon, Barnes & Noble, and the Death of the E-Reader

Well, it was nice knowing you, e-readers. Thanks to the explosion of reasonably priced tablet alternatives, e-readers are quickly becoming novelty items. At least, that's the word from research firm IHS, and its latest consumer electronics survey.

The demise of the e-reader isn't surprising really, as fast, efficient tablet alternatives inundate the market. Sporting an old-school Amazon Kindle or Barnes & Noble Nook nowadays is akin to owning a feature phone. With the shift in consumer mobile buying habits, Amazon and Barnes & Noble are in similar predicaments; find revenue alternatives, or become irrelevant.

It was over before it began
The first real e-reader to make a splash was Sony's Librie in 2004. Users of Sony's e-reader could download up to 10,000 pages, perusing books, magazines, and a host of other literature at their leisure, using a new, electronic paper display.

When Amazon unveiled its first Kindle in 2007, the sale of e-readers really took off, and enjoyed several years of explosive growth, capped by a whopping 23.2 million units sold in 2011. Alas, 2011, as it turns out, was the beginning of the end. According to the IHS study, e-reader shipments will drop to 14.9 million this year, and a mere 10.9 million units are expected to be sold in 2012. By 2016, as per IHS, Amazon and Barnes & Noble, along with the other minor e-reader players, will see their market shrink to sales of about 7 million; a pittance compared to last year's peak.

Rise of the tablet
Not coincidentally, the rapid decline in e-reader sales comes only two years after Apple introduced the iPad. Even at considerably higher price points, the capabilities of tablets like the iPad offer consumers much more than merely cool, electronic paper turning, making the additional cost well worth it. The dramatic rise in tablet sales is as quick as the decline of the e-reader: IHS forecasts 120 million tablets will be sold this year, rising to 340 million by 2016.

The functionality of the iPad made the decision to pay more an easy one for consumers, but the dramatic rise in tablet sales goes well beyond Apple. Google's Nexus, a couple of Samsung's tablets, along with new and improved Kindle and Nook offerings, are all available for little more than what consumers used to pay for e-readers. It's the entry-level tablets that are ultimately responsible for the death of the e-reader.

Where does that leave Amazon and Barnes & Noble?
To their credit, both Amazon and Barnes & Noble have significantly upgraded their tablet offerings in their efforts to win the tablet wars. Each tablet offers a low price point and, up until now, at least, neither appears ready, willing, or able to take on the higher-end iPad, Microsoft Surface, or the Cadillac version of Google's Nexus. Good move.

The investment story for Barnes & Noble is the same as it's been for all to long now. The spin-off of its Nook business into a separate subsidiary, and the $300 million infusion from Microsoft for a 17.6% share, didn't go far enough. The transition of the Nook and college businesses into a distinct business unit was the worst kept secret of Barnes & Noble CEO William Lynch's life; everyone knew that one was coming. The objective was to unlock shareholder value -- as it should be, particularly considering the retail line continues to lose market share.

But to really unlock the value of the Nook and college subsidiary, Barnes & Noble should spin-off the Nook line as a separate, publicly-traded entity. For Barnes & Noble, staying relevant means becoming a significant player in the tablet market, plain and simple. And, by all accounts, the new Nook HD and HD+ are getting rave reviews, so why not let shareholders enjoy Barnes & Noble's only opportunity for upside, without the continued drag of the retail business? Until you can buy Nook, and Nook alone, the gains year-to-date for Barnes & Noble is about all you're going to see.

As for Amazon, it continues to prove there are long-term investors out there, who are ready and willing to give CEO Jeff Bezos and team some time. With the huge investments in distribution centers, not to mention the R&D associated with its own new and improved Kindle Fire, traditional financial measures don't apply for Amazon. With multiple revenue streams, a strong balance sheet, and solid inroads into mobile computing, Amazon remains a solid growth opportunity.

Hold onto that old e-reader; it could be a valuable antique someday. Until then, don't be surprised to see the "Buy 10 EBooks, get an e-reader free!" deal, coming soon to an Amazon and Barnes & Noble near you.

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The article Amazon, Barnes & Noble, and the Death of the E-Reader originally appeared on Fool.com.

Fool contributor Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft and is short Sony and has the following options: long JAN 2013 $22.00 calls on Sony. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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