By Dan Mitchell
October 3, 2011

FORTUNE — Oh, the woes of running what might be the ultimate “legacy business” — a chain of bookstores. While Barnes & Noble has made a valiant effort to keep up with the times with its innovative line of Nook e-readers, it simply can’t compete with the likes of Amazon, which introduced its potentially category-killing Kindle Fire last week.

B&N (BKS) almost has to respond to Amazon’s (AMZN) ultra-low price on the Fire — $199 — by whittling away at the price of its Nook Color, now at $249. But that will simply eat into B&N’s margins in what had been the company’s one area of growth. Amazon’s going cheap for a simple reason — it means to make its money on content: books, movies, music, games. And it has a lot more of that than B&N does, not to mention a far better infrastructure for selling them to just about anybody.

B&N, meanwhile, is weighed down by a coast-to-coast chain of nearly 800 stores where sales are generally flat or falling. The company has lost money in six of the last eight quarters. Despite all the money B&N is forced to pour into its stores, a full quarter of its revenue now comes from the Nook and e-book sales. But Amazon owns 60% of the e-book market, while B&N has only about 20%. With the Kindle Fire, that ratio promises to only get worse for B&N, even after it lowers prices on Nooks. Amazon last week also announced three more Kindles at the lower end that are priced below B&N’s comparable Nooks. For example, the Kindle Touch is going for $99, while the Nook Touch lists at $139. That’s very tough.

There is some question over whether Amazon is making or losing money on each Kindle Fire sale. But there’s no question the company is sacrificing margins in order to sell content and take more market share — non only from B&N but also, perhaps, from Apple’s (AAPL) iPad.

The Nook Color was B&N’s great leap ahead. And to the surprise of some when it was introduced, it turned out to be an excellent product. It took Amazon a year to counter it with the Fire. But here’s the difference: Well before the Nook Color was introduced, Amazon was expanding beyond being just a retailer. It has already more or less become a media-distribution company. B&N is still basically a book peddler — a respectable profession, but not, sadly, a competitive one. While B&N was boasting that it sells 3 million sandwiches in its stores every year, Amazon was building a cloud, as well as a new browser, Silk, that could revolutionize e-commerce.

Investors have had several days to digest the Kindle news, and they might want to gulp down some Mylanta. On Tuesday, the day before the Kindle Fire was introduced, B&N shares reached as high as $13.95. In midday trading on Monday, they had sunk to $11.07, a loss of more than a fifth of their value.

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