DangDang.com (NYSE:DANG), China’s largest online book store is going through some major problems at the moment.

Firstly, financially they have recorded three consecutive quarters of losses due to setting lower prices and promotions to attract customers away from 360Buy.com and TMall.com. Shares have dropped 84 percent last year, falling below the December 2010 initial public offering price of $16. The company last month posted a fourth-quarter net loss of 129.8 million yuan ($21 million), compared with profit of 14.8 million yuan a year earlier.

According to a Bloomberg report, CFO, Conor Yang “Pricing is a very important factor for margins,” Yang said in the Bloomberg Television interview. “Even as we’re selling at 30 to 35 percent cheaper than physical bookstores, we’re still able to enjoy a fairly good margin because of our scale.”

However I don’t see pricing as the real problem. I see selling physical books as the real problem. I mean the new digital media form through e-books on tablets and reading content on mobile is displacing the need to buy physical books. You can see this trend just taking the subways in Beijing.  But of course this doesn’t mean people don’t like reading physical books, it’s just a declining trend. DangDang will need to re-consider its strategy towards products that are content driven, including books. It’s important to know that DangDang sells many other product categories such as electronics, sports, clothes, home ware, cosmetics and baby goods.

Secondly, Chinese media has reported that DangDang has been caught in an embarrassing situation after user accounts and passwords have been compromised. From March 19-21, the company has frozen all user accounts and ability to use gift cards. They have urged customers to change passwords. One female victim discovered that someone used her account to buy a 9K RMB laptop. Apparently DangDang was aware of these problems since December but denied the rumour that 1.2 million user accounts were compromised. This conjures up bad memories from December, where a number of high profile Chinese websites such as CSDN , Duowan ,7k7k, 178 and Tianya were hacked.