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Why Indigo and Kobo are doubling down on their e-reader

Kobo is likely stuck in the hardware business for the foreseeable future, whether it wants to be or not.

The Kobo eReader Touch, an Amazon Kindle, an Aluratek Libre Air, and a Barnes & Noble Nook, left to right, are displayed in this photo, in New York. (Photo: Richard Drew/AP)

The Kobo eReader Touch Edition started appearing at Chapters and Indigo outlets on Friday morning. It’s the company’s third generation hardware product; that it exists at all suggests that the Indigo digital reading spin-out’s strategy has changed considerably in the last year.

Fourteen months ago, when Canadian Business first took a look at Kobo, the company was partnering with booksellers and device-makers in North America and abroad; its platform would power their e-book stores and it would become, as one observer put it, the “Intel inside” for the e-reading sector.

At the time nobody doubted e-books were going mainstream, but the speed of that disruption has been astonishing. Last month, Amazon announced that its e-book sales now exceed the sales of hardcover and paperback books combined. Kobo CEO Michael Serbinis ultimately expects some 50% of the $90-billion global book market to go digital. How big a piece of that pie Kobo will carve for itself remains in question; they say they’ve currently got about 10% of U.S. e-book sales, roughly the same as Apple’s iBooks store and well behind Amazon and Barnes & Noble.

Though it launched an e-reader of its own last spring, Kobo’s hardware didn’t offer as many features or as much horsepower as did rival devices; it was in some ways best considered a showcase for the Kobo platform, as Google’s Nexus One phone was for its Android operating system. But a few trends have emerged in the months since that have made Kobo step up its hardware game.

For one, the e-reading marketplace has consolidated quickly. “What happened in the last year is we went from 160 companies making e-readers to three that matter,” Serbinis tells CB. “And we’re one of those three.”

E-reader manufacturers like Pandigital and Sony will take issue with such a narrow description of the marketplace (the other companies “that matter” being Amazon, with its Kindle, and Barnes & Noble, with its US-only Nook), but the point is that most of the countless e-readers and tablets announced in the last two years have failed to make it to market, or have found few buyers once on the shelves. If Kobo’s original strategy saw them earning a share of the e-book market share by being on dozens of other devices, that no longer seems such a viable play.

What’s more, despite middling reviews the first- and second-generation Kobo Readers actually earned some traction, thanks to entry-level price points and a distribution network that grew beyond booksellers to retailers like Wal-mart and Best Buy. And while some wrote the obit for the entire e-reading category on they day in early 2010 Steve Jobs unleashed the iPad, e-readers generally are showing impressive resilience.

Perhaps most importantly, though, the most dedicated e-book buyers—by the Pareto principle, the 20% of customers who account for 80% of purchases—are still buying e-readers. Though Kobo’s apps for iPad and iPhone have earned strong reviews and millions of downloads, and though the Kobo app comes preloaded on several of the Android tablets that have made it to market (not to mention the BlackBerry Playbook), the company’s internal analysis shows that the people who buy several books a month are reading them on e-readers, whatever tablets and smartphones they also happen to own. To make those book-lovers Kobo customers, the company’s e-reader has to be competitive with the best B&N and Amazon have to offer. Says Serbinis, “The eReader’s absolutely become more important for us. Hardware overall is a low-margin business, but we look at it as a way to get the best customers.”

And so Kobo’s likely stuck in the hardware business for the foreseeable future, whether it wants to be or not. CB hasn’t yet played with one of the new-generation Kobo eReaders, but they’re the first device to market with the fast Freescale i.MX508 processor, and use Neonode’s zForce infrared technology to make their Pearl E Ink screens touch-sensitive. With a host of other features, including the Kobo Reading Life software which gamifies the reading experience, they seem to be better placed in the e-reader conversation—pending, of course, whatever Amazon unveils later this year. 

Meanwhile, Kobo recently rounded up an additional $50 million from institutional investors. It will help fund expansions into European markets like Germany, where they hope to secure first-mover advantage, and a big push in the coming weeks and months to better establish the Kobo brand on its own, rather than as a component of Indigo or struggling Borders Group. Indigo, which retains a 51% ownership stake in the company, continues to invest heavily in the e-book play, pushing the parent to a recent Q4 loss. The company continues to believe it can become Amazon’s primary rival in the global e-book market; that means its hardware can no longer be second-best.