Competition is getting tough in the digital reader category. Tight margins and rapidly evolving devices are likely to thin the marketplace by next year. Currently, a price war is going on. Today, bookseller Borders lowered the price of its e-reader devices…again. Starting at $99, the Alarutek is the cheapest e-reader on the market.

Borders is trying to get back into the black with fewer stores and a focus on digital books. But can cheap prices and customer rewards save a business? That’s not clear.

Borders is frantically trying to fight customer flight. The bookseller fell behind competitors such as Barnes & Noble and Amazon as customers began purchasing books online. Until 2008, Borders worked with Amazon to sell its products digitally.

But with in-store book sales dwindling, conceding its digital presence to Amazon for the better part of the past decade turns out to have stuck Borders squarely behind the eight-ball.

The book business is going digital. Whoever can sell the most e-readers will also be in the best position to sell books to those customers. That’s why Borders is working to stay in the e-reader business by drastically slashing prices.

The iPad starts at $499, and dedicated digital readers are even cheaper. Amazon’s e-reader starts at $139. The price drop resulted in Kindle’s being sold out until mid-September. 

Not to be outdone, Borders today announced that its low end reader, the Aluratek, is now available for $99. Their Kobo eReader now costs $129. Preorders for their color e-book readers, the Velocity Micro Cruz Reader R101 and The Cruz Tablet T103, go for $199 and $299.

It will be interesting to see how the Aluratek and Kobo sell over the next few months. For Borders, things are getting dire. Holiday sales figures were disappointing last year. The company has been closing stores around the world.

Last year in the UK, the company was placed into administration (the equivalent of Chapter 11 bankruptcy in the US). Though layoffs have helped cut costs over the last year, the company needs to start selling product to get back on its feet.

Low costs e-readers are one part of that process. The other piece announced today is increased rewards for loyal shoppers. Borders rewards members can now receive a personal shopping day with a 10% discount on top of the 25% discount
they already receive on many products. They’re also starting rewards for teachers, including “Borders Bucks” customers can send to their favorite teachers. 

If Borders can sell the same books cheaper than its competitors, it may be able to make some headway online. But Amazon’s vast product offering often wins over consumers, even if single book purchases can be found for less elsewhere.

Borders has an uphill climb if it wants to catch up to Barnes & Noble and Amazon selling books online. As competition in the e-reader market accelerates, it’s going to be hard to avoid becoming a casualty. Even with a lower cost reader, many consumers are looking for a platform that can handle all of their book needs.

This is the proposition that has worked for Apple so far in mobile. Even if other manufacturers come out with cheaper or more exciting smartphones, iPhone owners have invested so much in apps and music that they would be costly to replace on a new device.

Even if Borders’ e-reader is cheaper than its competitors’ — and its rewards program pays more — in the highly competitive book business, it’s not likely to be enough for a rebound.