By Edward Nawotka, Editor-in-Chief
For the last six weeks following the dismissal of William Lynch as the company’s CEO there have been a slew of articles eulogizing Barnes & Noble.
The story appears to be simple and straightforward: starting in 2009, after years of losing market share to Amazon and the launch of the Kindle, Barnes and Noble (B&N) — America’s dominant bookstore chain — tried to turn itself into a tech company and this, in retrospect, is now viewed as a grave mistake.
But was it really? Well, yes and no.
When B&N installed William Lynch, a tech-minded Texan, as head of its online business (later, promoting him to CEO), the New York-based company had all but ceded the ebook business to Amazon. Lynch proceeded to open a large office in Silicon Valley, staffed it with some 300 programmers, designers and developers, and launched a handful of innovative eink readers and Android-powered tablet computers under the Nook brand. By 2011, it had clawed away 25% of the then $2 billion US ebook market away from rival Amazon.com.
Prospects for B&N’s Nook business looked sunny: Microsoft announced a $300 million investment in a new company, Nook Media, which included the ebook division as well as B&N’s nearly 700 university bookstores (Pearson contributed another $89.5 million at the end of 2012); B&N had launched Nook in the UK and said it would roll out Nooks in 10 more international markets by mid 2013; and Flashy new tablets were due on the market for the holiday shopping season. It was even suggested that the company might remove the word “booksellers” from its official name — a gesture to the public, and particularly Wall Street, that the company serious about the future and not tied to “legacy” products like physical books.
Of course, a lot can change in a year, which is the reason for the current hand-wringing and eulogizing.
When the financial results for 2013 were announced, the Nook business posted an operating loss of $475 million on $776 million. Today, Lynch is out as CEO (taking millions in bonus money and severance with him), Nook has launched in not one new international markets, and B&N appears to be pulling out of the tablet business altogether.
What happened? B&N’s flashy new tablets simply didn’t sell. Contrary to would-be spinoff company’s name, Nook Media, B&N had never developed the level of rich media content — movies, music and television shows — that Apple and Amazon offer. Amazon offered its Prime On Demand service as well as specialized all-you-can-consume packages for children; Apple had the most desirable tablets in the world and a loyal base of users. The new Nooks units sat on shelves gathering dust. (And have been selling at very deep discounts to clear inventory ever since).
So now, the company is refocussing back on books. And it makes sense.
Len Riggio, B&N’s founder and executive chairman, is at heart a bookseller. In contrast to Nook, the physical bookstores did respectably well in 2013. Though sales fell by 5.9% over the year, they still generated revenue of $4.6 billion — and, what’s most important — a profit of $374 million, up 16% from the year before.
At the bookstore level, B&N has benefitted from the lack of a single large bricks-and-mortar competitor (since the demise of Borders in 2011) and is relying far less on high discounts (there is no fixed book price law in the US) that erode margins on books. The company also has continued to expand its selection of more profitable non-book items, such as games and toys. And perhaps of most importance, it has been diligent about closing unprofitable locations — as many as 10 stores per year for the past several years. Today 95% of locations are generating profit.
What’s more, Markus Dohle — the CEO of the newly combined publishing giant Penguin Random House and the former head of Bertlesmann’s printing unit — has reiterated time and time again his company’s commitment and belief in the future commercial viability of print publishing. And why wouldn’t it? The company is now responsible for some 50% of all the commercial trade books in the US and has perhaps the most sophisticated and streamline sales and distribution systems in publishing. They have no interest in seeing B&N’s retail operations diminished in any capacity.
When it comes to Amazon, B&N may be losing ground in both physical and ebook sales, but they have them beat in one very important area: textbooks. Those aforementioned 700 university bookstores generate a reliable income each year from textbooks, particularly as instructors have proven reluctant to convert students wholescale to digital learning platorms. Print textbooks, which are much higher priced than trade books and subject to far lower discounts, is one significant area where Amazon seems vexed.
Looking forward a year, the future is hazy (insert your own Magic 8 Ball joke here). Riggio may make a bid to take B&N private, but that depends on market conditions and 2013 has yet to have a monster bestseller like Fifty Shades of Grey to bring customers into stores, so sales may once again fall. The Nook platform, which is itself viable, will still likely remain an important part of B&N’s ecosystem: after all, Microsoft is committed to investing another $155 million in Nook over the next five years — surely enough money to sustain the platform. Whether they will continue to produce ereaders remains up in the air. White box devices that can be branded B&N are easy to purchase from outside vendors. But you should expect more tie-ins and incentives to draw in Nook owners — who may not regularly shop in stores — to visit the physical locations (notably, this is something B&N failed to do much of in the past).
As far as Amazon is concerned, so long as B&N can hold onto and develop its university bookstore business, it will have a firm foundation from which to sustain its larger trade bookstore division — though you should expect to see more cutting and trimming in the number of trade stores, to get out of expensive leases (don’t forget that bookselling is also as much a real estate business, as a retail book business). As the company shrinks, expect them to opt for a more deluxe shopping experience, featuring better customer service and a more carefully edited selection of titles, possibly even something more akin to an independent bookstore.
Oh how times have changed. It was’t so long ago — the 1990s in fact — when B&N was being blamed for the “death of the independent bookstore” and was reviled as the bully of the bookselling. Today: independent bookstores are having a surprising resurgence and B&N must be relied on by a vast swath of the publishing business to provide a significant outlet (and defacto “discovery” platform) for the ongoing print business.
I expect that so long as we have a print books business we’ll have B&N.
A version of this article originally appeared in Borsenblatt.