Can This Booksbatore Be Saved?
CASE STUDY
B orders Group (including many former
Waldenbooks rebranded as Borders Express)
liquidated its assets and closed all of its
locations in the second half of 2011. The
previous year had already seen the demise of B.
Dalton, a Barnes & Noble subsidiary since 1987.
Since 1991, eleven major U.S. bookstore chains have
been whittled down to six, and nearly 3,300 stores to
just over 2,200 in 2011.
Still in the lead after over 20 years of domination,
Barnes & Noble was often painted as the bully,
driving both regional chains and small independent
bookstores out of business with its aggressive
pricing tactics and unbeatable inventory. Before
e-commerce reshaped the landscape, its superstores
forced smaller rivals into “most titles offered” wars.
As smaller chains struggled to keep pace, support
from publishers was not forthcoming. This shortterm,
bottom-line strategy would come back to haunt
publishers.
B&N kicked around the idea of selling books
online, experimenting with Trintex, a 1980s Webretail
prototype, selling books on CompuServ in the
mid-1990s, and opening an online shop on AOL.
However, it was not until 1997, fully two years after
the arrival of Amazon, that it launched its first Web
site. Data from numerous emerging e-commerce
markets now verifies that books are an ideal initial
product to draw first-time buyers. B&N was already
behind the curve.
Amazon, launched initially as an online bookstore,
upended the titles war. While B&N might be able
to offer over 200,000 titles in its bricks-and-mortar
stores, Amazon offered an inventory limited only
by publisher availability. Shrewd financial moves,
including selling 50% of its Internet operation to
German giant Bertelsmann in 1998, kept B&N in
the game. It established a new industry standard of
750,000 titles on-hand and bragged that it could procure
over 8 million new, out-of-print, and rare books
for customers from suppliers. However, Amazon
continued to trump B&N on innovation. When B&N
launched its online music store in 1999, several
months after taking barnesandnoble.com public and
refurbishing its cash reserves, it was again playing
catch-up with Amazon, which had pioneered the concept
a year earlier.
In early 2009, when B&N purchased Fictionwise,
one of the biggest electronic book proprietors in
North America, it was again behind the technology
curve. Amazon had already unveiled its Kindle
e-reader sixteen months earlier. What’s more,
Amazon would offer New York Times bestsellers and
other popular e-books for less than $10.
While publishers fretted that readers would be
reconditioned to devalue the worth of the printed
word and that offline stores would be strained to
their limits discounting print books to compete,
B&N scrambled. It took until July 2009 (two months
after the Fictionwise purchase) to finally unveil
B&N’s e-bookstore. Its Nook e-reader was released in
October, again more than two years behind Amazon.
Ironically, as early as 1998, B&N had partnered with
software companies such as Nuvo-Media to develop a
prototype e-reader called the Rocket, but it had nixed
the project in 2003 because there didn’t appear to be
any money in it. Now it had to hustle to refashion
itself as a seller of e-books, e-readers, and apps to
enhance the reading experience.
Critically well-received, the Nook began to scrape
market share from the Kindle when it sparked a
price war a year later. Dropping the price from $259
to $199 and releasing a WiFi-only model for $149,
B&N took aim at the giant. Amazon quickly countered
by slashing the Kindle to $189 eight hours later
and releasing the WiFi-enabled 3G Kindle3 within a
month, again at $10 below the Nook.
With titans such as Apple (iPad) and Google
(originally with the iRiver Story and in 2012 with the
Nexus 7) providing additional competition, the tables
had been turned on the former bookstore baron. Will
B&N be able to survive against these tech giants?
The answer remains to be seen. B&N was the only
bookseller with the resources to complete the considerable
task of developing an e-reader, marketing it,
and setting up manufacturing and retail operations
for the device. Its closest competitors were already
succumbing to the contraction of the chain bookstore
market, victims of both B&N and the e-commerce
revolution. Books-A-Million, with approximately 250
stores compared to 1,363 (689 retail and 674 college)
for B&N, is its closest remaining competitor.
While B&N still depends on its physical, brick-andmortar
stores to drive its business, the e-book market
is a horse of a different color. The economics of
e-book sales are very different from traditional book
sales. Customers who visit B&N’s Web site buy three
digital books for every one physical book, but booksellers
still make more money on print books than
e-books. And while having a competitive e-reader
seemed essential to successfully vying for market
share, it came at a steep cost. Moreover, it is not
the pivotal factor in controlling the e-book market.
Content is.
Since the price war, the reality is that in order to
compete with Amazon, e-reader hardware must sell
at or near cost, with profits derived from the sale
of digital content, including e-books, music, videos,
apps, and games. Once Amazon had wrung all
the profit it could from Kindle hardware, it quickly
maneuvered into adding apps and app features and
aggressively pursuing a cross-platform strategy. It
began marketing its e-books for tablets, smartphones,
and PCs using Android, Windows, and OS X operating
systems. Moreover, Amazon, along with Apple,
and another competitor, Kobo, are global competitors;
B&N is not.
Despite spending hundreds of millions of dollars
to compete with Amazon.com Inc. and Apple Inc.
in the market for tablets and e-readers, B&N continued
to lose money on the Nook, as well as e-book
market share. Analysts estimated in 2011 that B&N
controlled approximately 27% of the U.S. digital book
market while Amazon led with 60%. Since then,
Amazon has held steady, and B&N has steadily ceded
ground to Apple. B&N’s digital book market share has
dropped to 25%, and is still falling.
On June 25, 2013 B&N announced that losses at
its Nook digital business more than doubled in the
quarter ending April 27, 2013, wiping out profits
generated at its bookstores. As a result, the company
decided to stop producing its own color tablets
in favor of co-branded devices made by third-party
manufacturers. Barnes & Noble will continue to
design and make its own black-and-white Nook
e-readers, which account for the majority of its
e-book sales. But with e-reader sales declining, it is
unclear how competitive Barnes & Noble can be long
term without its own presence in the tablet market,
which is forecast to keep growing.
B&N retail store closings continued to outpace
new store openings as had been the case since 2009.
CEO Michael Klipper projected a net reduction
of one-third of B&N’s stores over the next decade,
reducing the total by about 20 stores per year until
between 450 and 500 remain.
While B&N has its back against the wall, it does
have a multipronged strategy for survival. It faces
a principal opponent with an estimated value 121
times higher than its own (B&N has a market capitalization
of $1.062 billion; Amazon’s is $121.5 billion).
But it also has allies. Publishing companies have
a vested interest in B&N’s survival. Physical book
retailers are indispensable for effectively marketing
and selling books. Bookstores spur publisher sales
with the “browsing effect.” Surveys show that just
one-third of bookstore visitors who make a purchase
walked in with a specific book in mind. According
to Madeline McIntosh, Random House president of
sales, operations, and digital, a bookstore’s display
space is one of the most valuable places that exists
for communicating to the consumer that a book is a
big deal. Brick-and-mortar retail stores are not only
essential for selling physical books, but also stimulate
sales of e-books and audio books, bring traffic
into malls, and serve as social gathering places. The
more visibility a book has, the more likely readers
will want to purchase it. With the demise of B.
Dalton, Crown Books, and Borders, B&N is the only
retailer offering an extensive inventory of physical
books. Book publishers need a physical presence.
Without B&N, the likely candidate to fill the void
is Amazon, and publishers are not eager for that to
happen. Amazon’s goal for e-books is to cut out the
publishers and publish books directly, selling books
at an extremely steep discount to drive sales of its
Kindle devices. Editors, publicists, and other entities
within the publishing business view Amazon as an
enemy. Selling books at Amazon’s discounted prices
is not a tenable business model for publishers in the
long-term.
If B&N is to survive it must capitalize on its profitable
retail stores, develop small, local communitybased
shops, expand digital content, lead the digital
education market, and develop marketing techniques
to drive e-book readers to purchase print books. B&N
has been experimenting with ways to drive traffic
to its physical stores. For example, if you connect
to a Wi-Fi network in a B&N store with your Nook,
you can get free extras in many apps and games
like Angry Birds, where you can unlock a bonus
character that normally costs a dollar. B&N has also
expanded its store space for toys and games, which
have higher profit margins, while reducing the range
of book titles it stocks. There are also plans to experiment
with slightly smaller stores in malls. Although
that strategy is boosting the company’s bottom line,
publishers worry it may also drive book lovers to
Amazon.com Inc., which says its physical book saWhat will the future hold? Will B&N be able to
succeed as a digital company and is there a future
for its brick-and-mortar stores? Is there a way for
e-books to help sell print books, just as print books
have stimulated demand for their digital versions?
Although B&N has made a spirited effort to revamp
its business and go toe-to-toe with several tech titans,
it’s possible that it might be too tall an order for the
storied bookseller.
Sources: Jeffrey A. Trachtenberg, “How to Rescue Barnes &
Noble? HereAre Ideas from Five Experts,” Wall Street Journal, July
1, 2013; Leslie Kaufman, “Barnes & Noble Rethinks Its Strategy for
the Nook,” New York Times, February 28, 2013; Tom Gara, “Barnes
& Noble: Stores Are Bad, but E-Books Are Worse,” Wall Street
Journal, February 28, 2013; Jeffrey A. Trachtenberg, “B&N Aims to
Whittle Its Stores for Years,” Wall Street Journal, January 28, 2013;
Horace Dediu, “Apple iBooks at 24% Worldwide Ebook Market
Share? One Analyst Thinks So,” Digital Book World, February 28,
2013; Michael J. De La Merced and Julie Bosman, “Microsoft Deal
Adds to Battle over E-Books,” New York Times, May 1, 2012; Shira
Ovide and Jeffrey A. Trachtenberg, “Microsoft Hooks onto Nook,”
Wall Street Journal, May 1, 2012; Julie Bosnan, “The Bookstore’s
Last Stand,” New York Times, January 29, 2012; Paul Vigna,
“E-Books, Apple, Amazon: The Deadly Hallows for Publishers,”
New York Times, April 11, 2012; Brian X. Chen, “Barnes & Noble
Uses Apps to Lure Customers into Stores,” New York Times,
January 27, 2012; Alexandra Alter, “Blowing Up the Book,” Wall
Street Journal, January 20, 2012; Jim Milliot, “Tracking 20 Years of
Bookstore Chains,” Publisher’s Weekly, August 26, 2011; and Jeffrey
A. Trachtenberg and Martin Peers, “Barnes and Noble: The Next
Chapter,” Wall Street Journal, January 6, 2011.
CASE STUDY QUESTIONS
3-13 Use the value chain and competitive forces
models to evaluate the impact of the Internet
on book publishers and book retail stores such
as Barnes & Noble.
3-14 How did Barnes and Noble change its business
model to deal with the Internet and e-book
technology?
3-15 Will Barnes & Noble’s new strategy be successful?
Explain your answer.
3-16 Is there anything else Barnes & Noble and the
book publishers should be doing to stimulate
more business?
