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Well, that didn't take long. Just a few hours after Barnes & Noble (NYSE: BKS ) slashed the price of its 3G e-reader to $199 while introducing a Wi-Fi-only Nook for $149, Amazon.com (Nasdaq: AMZN ) lowered the price on its Kindle to $189.
"Amazon is the more likely juggernaut to fire back," I wrote three hours before Amazon moved in with a $70 haircut on its Kindle devices. "It has been gradually slashing its Kindle's price tag since its introduction at $399 three years ago, and Nook's new price points can't be ignored."
Amazon also can't ignore Apple's (Nasdaq: AAPL ) iPad, but there isn't a lot that the leading e-tailer can do in competing against a $500 tablet that's moving a million units every month.
Shares of Amazon had been holding up well until the final hour of the trading day when its price cut was announced. The stock took a 3% hit, as investors feared that cheaper Kindles will dent the dot-com giant's margins.
Can Amazon turn a profit on the Kindle at a unit price of $189, or is it subsidizing the hardware in the hopes of making it up in e-book sales? We don't know, because Amazon has been reticent in discussing its e-book model. Apple had no problem letting the world know that it cleared 2 million iPads in its first two months on the market, but Amazon has avoided divulging actual sales metrics of its device.
I'm not overly worried about Amazon's fate.
I've seen this before.
I remember when Netflix (Nasdaq: NFLX ) took a hit after slashing its monthly subscriptions from $21.99 to $17.99 for its most popular plan of unlimited rentals with 3 DVDs out at any given time. It was 2004, and Netflix feared the entry of Amazon and wanted to scare off rival services powered by Wal-Mart (NYSE: WMT ) and Blockbuster (NYSE: BBI ) .
It worked. Wal-Mart eventually bowed out of the market. Blockbuster played along with the price war, but eventually tired of losing money.
I wouldn't be surprised if this is how it all plays out, with Barnes & Noble playing the part of the bricks-and-mortar dinosaur and Amazon walking in Netflix's shoes.
Now that the Kindle is roughly a third of the price of the cheapest 3G iPad, Amazon can concentrate on diehard bibliophiles that can appreciated a dedicated e-book reader. Nook may gain some traction on its $149 and $199 gadgets, but it will ultimately come undone the way Blockbuster had to back off of its price war with Netflix.
At the end of the day, Barnes & Noble has to be committed to preserving the livelihood of its physical stores. It is where its money is made, and it can't turn its back on its superstores to be a niche e-book player with what is likely crummy margins.
Amazon is doing the right thing, even if it feels so wrong to Mr. Market right now.
Will your next gadget purchase be a Nook, a Kindle, or an iPad? Share your thoughts in the comment box below.