El Segundo, Calif. - Barnes & Noble and Amazon dropped the prices of their 3G-equipped e-book readers because of competition with the multifunctional iPad, driving down the two companies' e-reader gross margins from around 20 percent to around the break-even point, iSuppli said.

As a result, the two companies' e-reader business models will emulate the video game industry business model, iSuppli said. "With zero profits on their hardware, both these companies now hope to make their money in this market through the sale of e-books," explained William Kidd, iSuppli director and principal analyst. "This is the same ‘razor/razor blade' business model successfully employed in the video game console business, where the hardware is sold at a loss and profits are made on sales of content."

On June 21, Barnes & Noble cut the price of its 3G/Wi-Fi-equipped Nook to $199 from $259 and launched a Wi-Fi-only model at $149. Amazon countered on the same day to reduce its 3G/W-Fi-equipped model to $189. "Not coincidentally," iSuppli noted, Apple launched its iBook application for the iPad, iPhone and iPod.

In the "very short-term, the price drop could entice consumers to purchase e-book readers that cost less than half of the starting price point for an iPad," said consumer electronics analyst Jordan Selburn. "However, the longer-term future of eBook readers is likely to be more niche than initially expected."

The future of dedicated e-readers "will largely depend on whether device manufacturers add technological functions to remain competitive with the more dynamic, multifunction iPad, iSuppli noted. A color e-ink display for e-book readers is in development but is at least a year away from the market, iSuppli said.

"In sum, there is no visible short-term solution to drive significantly more sales of eBook readers, except to use price as a tool," Kidd said.