The Shatzkin Files


Barnes & Noble and managing the digital transition


We keep making the case that the split that matters when trying to foretell the future of the book business (and everybody in it) is not “print” versus “digital”, but “bought online” versus “bought in stores”.

Of all the major retailers, only Barnes & Noble has a stake in all four of the meaningful transaction streams for trade books: print in stores, devices in stores, print online, and ebooks. (All devices are available online.) Amazon has no store presence. Kobo has a minimal store presence through independent retailers but has no print business. Apple has no store presence for content at all and doesn’t sell print online. And Google seems to only tangentially deal with any of the non-digital content businesses.

In fact, B&N is in a fifth “segment”: college bookstores. That segment was the only one that showed revenue growth in their latest reporting, although even in that segment same store sales showed a slight decline. College textbooks having been slow to move to digital has helped preserve that business, but it would be a weak bet to expect that to last forever, or even for many more years.

What this means is that Amazon, Kobo, and Apple are firmly planted in parts of the business that are growing. Kobo and Apple only sell ebooks and Amazon sells print too, but, in general, the migration to online buying and ebook consumption is going to continue so the sales taking place in the environments in which they operate will continue to grow. Whatever their share, they will be taking it from a bigger and bigger pie.

B&N, on the other hand, gets most of its sales from print in stores. That is the component of the sales which is declining and bound to continue to decline. That means that B&N, uniquely, has the challenge of keeping its customers as they switch their mode of buying and consuming books.

The retailer announced their latest quarterly results this week and, at least superficially, they are not encouraging. Sales of devices are down. Sales of digital content are down. Sales of print in stores and online are down. The company points out that book sales in general took a hit because the two most recent book sales phenomena, “Hunger Games” and “Fifty Shades of Gray” are running out of steam and haven’t been replaced by The Next Big Thing(s) yet. But in the absence of sales information about print and ebooks from Amazon (which data is normally well-masked in their overall reporting), we have no basis for comparison. And comparison is what we need to know how B&N is doing and what their future holds.

In other words, are Amazon’s online and ebook sales declining because of the lack of a replacement for “Hunger Games” and “Fifty Shades”? Or is B&N not only losing sales, but also losing share as the market migrates from stores (their strength) to online (Amazon’s strength)?

There really is no “industry” data to help us get at an answer to that. For a few years in the prior decade, Idea Logical did some sales data analysis work for a number of publishers large and small. Each publisher gets clear reporting of its sales in a granular-enough way to examine this. Of their B&N sales, they know what is digital and what is print, and they know what is sold in stores and what is sold by BN.com. At the time that we were doing this work, which ended before ebooks became a significant portion of the commerce, it appeared that Amazon sold about 10 times as many books across most lists than BN.com did. (Of course, at that time at least, B&N stores sold more than Amazon.)

Barnes & Noble is in a unique position. Every other player is looking to capture customers migrating from old patterns to new ones, whether switching from buying print in stores to buying it online (Amazon) or switching from reading print to reading ebooks. Only B&N is trying to keep customers who came to them for print in stores.

In 2010 and 2011, it appeared they were doing very well at just that, selling lots of Nook devices in their stores. It appeared that there were a large number of heavy book readers who had been unwilling to jump to digital. Perhaps they wanted to see and touch the devices first. Perhaps they wanted to see that many friends and family of theirs had made the leap before they would. Or perhaps they just wanted their trusted book vendor, Barnes & Noble, to offer them the ebook opportunity.

The anecdata suggested (there was no clear objective data to prove) that, following the launch of Nook in the Fall of 2009, B&N’s format shot up pretty quickly to a market share in the neighborhood of 20-25%, with Apple (initially) taking about 10% with the iBookstore. Amazon’s Kindle declined from more than 90% of the market to around 60%.

Then some things changed in the marketplace. The DoJ suit effectively ended publisher-set pricing. Apple took the direct link to the bookstore off all the iOS apps except their own. And tablets and phones increased their share of the ebook market in relation to dedicated ereaders. Again, relying on anecdata where no industry data exists, reports suggest that the B&N/Nook share has declined, Apple’s iBookstore has risen, and Amazon has perhaps come back a bit. (Amazon, Apple, and Kobo have a much bigger global footprint than B&N, although that probably doesn’t matter much in the US market.) Certainly, the numbers from B&N reporting that digital content sales have declined in real terms strongly suggests a reduction in their US market share. Overall digital content sales have almost certainly not declined.

It is beyond B&N’s power — or anybody else’s — to do much to affect overall consumer behavior. People will buy and read in the way that the current combination of price, convenience, and technology motivate them to. In the abstract, it would seem that a company that has a foot in all the markets would have a better chance to capture people switching buying or reading modes than a company with a more limited offering. It would seem that way, but it isn’t working out that way. B&N has to figure out how to make their ubiquity work in their favor which, except for a year or two around the debut of the Nook, they haven’t managed to do yet.

The facts tell us that Barnes & Noble failed years ago to make its store customers into online customers. They’ve been sharing customers with Amazon since Amazon began. Indeed, the skill sets a corporation needs to run a successful online business aren’t the same as they are to run a chain of physical stores. But it can be done: the office supply retailer Staples is the second-largest online retailer in the US. I think if I were at B&N I’d be asking somebody up there how they did it.

BN.com has been the weak link in the Barnes & Noble chain since they launched it under joint ownership with Bertelsmann. When the company was run by strong merchants, they didn’t pay close attention to it. For the past few years, the company has been run by an ebook-focused management and they didn’t improve it. In both cases, BN.com’s success was secondary to another agenda. It is ironic that the current management, rooted in finance and operations, seems to have focused on this core — perhaps existential — strategic problem, with improvements in BN.com promised shortly.

Another aspect of the B&N reporting was that major shareholder and Chairman Leonard Riggio announced that he is “suspending” his interest in buying the stores. Whether that is an indication that he’s less confident of their future than he was before or whether, as the announcement says, he just feels that B&N as a company needs to concentrate on making the Nook-and-store combination work more effectively, is not something anybody but he and his closest advisors know for sure.

  Back to blog

  • Peter Turner

    Great post, Mike. What I really have a hard time understanding is why B&N continues to try to compete with Amazon in any sector of their business. Wouldn’t it make more sense to look closely at what B&N does best (that is from the customer POV) and invest in that? Trying to sell more cheap eBooks and revamping their website–which seems like the sum of their “new strategy” accompanying their Q1 reports–goes to Amazon’s strengths, not B&N’s.

    • http://idealog.com/blog Mike Shatzkin

      I see your point, but I’m not sure I agree. BN.com has to succeed better than they do at core functions. Their search doesn’t work like it should and never has. They don’t have to *invent* good Internet selling practices, but after Amazon sets the standard they clearly have to match them. The trend is entirely toward online discovery and purchase. Expertise in what they’ve always done well has declining value; they have to acquire 21st century skillsets if they want to play deep into the 21st century.

      I think that for most of the time since BN.com began, it has not been seen as strategically mission-critical for the corporation; it wasn’t just BN.com’s management that failed, it was not fitted sensibly into an overall perspective of their business’s future. It’s way past time to have recognized that, but perhaps now they can. If Staples could do it, Barnes & Noble should be able to do it.

      Mike

      • Peter Turner

        I do agree that they need a top-notch website. I just don’t feel that that’s a strategic choice–more of ecommerce necessity. A strategy to survive and thrive would have to involve a focus on what B&N does or can do distinctly better than its competitors. Believe me, I’m rooting for them, but I’m not seeing (or hearing) it.

      • http://idealog.com/blog Mike Shatzkin

        Well, it’s not easy. I couldn’t guarantee that there is a way to win. Amazon has significant advantages and they’re a very smart competitor. B&N’s chances would have been much better if they’d leveraged their natural edge in books ten years ago. Now that “natural edge” may be gone and Amazon has a much broader base of products and services and revenue and infrastructure. It’s David against Goliath, and B&N is definitely in need of a helluva slingshot.

        Mike

      • Peter Turner

        Yes, one heluva slingshot indeed! I might argue that B&N’s true strategic competition is the indie bookstore (and BAM, etc.). They have the real estate, now they need some major bookselling chops.

      • http://idealog.com/blog Mike Shatzkin

        The indie bookstores and BAM need some mighty slingshots too. Competing against them is something B&N can do, but they’re all going to fall to the Internet in due time. You have to win on the Internet to be significant in five or ten years.

        Mike

      • Peter Turner

        Yes, you’re right of course, but if they’re going to be relevant online they’re going to have to deliver some quality or value not based on low price, convenience, etc.–i.e. the “value proposition” Amazon owns and will kill to continue to own.

        A great question for any book retailer–online or off–to ask: “What do I uniquely or distinctively provide my customers?” Then pour your heart, soul, and cash into that!

      • http://idealog.com/blog Mike Shatzkin

        Peter, it’s a great question, but *you tell me* the answer for Barnes & Noble that scales and makes sense. Because I sure as hell can’t tell you. And I talk to a lot of people, and nobody’s told me yet. Buy online and get it in the store? (Yawn…) Buy it in the store and get it delivered by online? (Hnh?) I dunno. Amazon’s proposition is “we do a perfect job, we have everything, we make it easy for you to find it, and we’re usually the lowest-priced and, by the way, you can get anything else you want — new or used — at the same time and throw it in your cart.” I can see how you can offer something distinctive in a *niche* — even in books alone, businesses like allromanceebooks.com can carve out a spot for themselves — but how you make a big general proposition that competes? That’s a question that makes you at least consider the existential reality that not all problems have workable solutions.

        Mike

      • Peter Turner

        The answer to this question may be, “We’re toast”–and actually that’s what I expect. But, what if, just what if B&N did something stupid-arse brilliant-crazy? I’ve got a little list.

      • http://idealog.com/blog Mike Shatzkin

        I don’t know. What if pigs fly?

        Surprises happen. Businesses reinvent themselves. Staples is the number two Internet retailer in the US. (And they really could add books pretty easily if they just figured it out; with a former Borders CEO in top management there I think they will before long.) I am certainly not suggesting that B&N is on the verge of collapse. They have time. Years, *probably*. But something drastic has to change. Amazon can continue to build on what they have because the market for it is growing. They don’t have to change course in some way. Barnes & Noble does. I am certainly not saying that anything is impossible. But I am saying that it ain’t a riddle that *I *have the answer to, either because I made it up or because I learned it from somebody else who did.

        Mike

      • Peter Turner

        Do you think one viabable strategy might be for B&N to:
        1. Focus on becoming excellent at bookselling at their physical locations (where there’s no competition with Amazon); and
        2. Take their existing customer data (which offers them a competitive advantage over other new-discovery sites) to provide niche-oriented discovery and sales–a dimension that Amazon hasn’t focused on as yet.

      • http://idealog.com/blog Mike Shatzkin

        They’d say they’re already doing the former. They beat Borders because they did the former better. They swamp BAM and others because they do the former better. They put lots of indies out of business because they do the former better. Are there ways to improve? Sure, but they’re not slouches at running brick-and-mortar bookstores. Nobody has done it at scale as well as they have anywhere else.

        As for the latter, there is less there than meets the eye. They have sales data for people who have B&N loyalty cards. They don’t have sales data for everybody else, nor the right to connect with them. They have the same problems with sales data that Amazon does, only worse. They don’t know which of the books I bought were bought for myself and which for others. At least Amazon might know I shipped to a different location; all B&N could know is what I walked away from the cash register with.

        Sorry, neither of these rises to the level of a “solution” from my perspective. Necessary, but not sufficient.

        Mike

      • Peter Turner

        So, “toast”?

      • http://idealog.com/blog Mike Shatzkin

        Not soon. But without some change in course I haven’t thought of or heard of yet, eventually, yes. They’ll sell a LOT of books between now and then. And maybe somebody smarter than we are will think of something. Or the world will change in a way we’re not foreseeing.

        Mike

  • http://www.thefutureofpublishing.com/ Thad McIlroy

    Great analysis. I keep looking to Barnes and Noble’s college stores for a source of stability and possible growth. Yes, textbooks have been slow to move to digital, but the main hit on college store income has been the shift to used textbooks and textbook rentals. Still, about 40% (on average) of college store sales come from (more profitable) non-book items (clothing, stationery, etc.). B&N has only about 16.3% of the $10.45 college market, and it slowly but surely wins new stores either from the competition (mostly Follett) or from stores operated by the colleges themselves (in the quarter college store sales increased “2.4% compared to a year ago, as a result of new store growth”). Throwing the college stores in with the dastardly Nook business last year was one of the more curious moves from a curious company.

    • http://idealog.com/blog Mike Shatzkin

      Thad, I think the threat on the college side is analogous to the problem children’s *book* *publishers* face in the digital future. As children’s books change into something other than what they’ve been, book-making expertise is less important than animation and gaming skill. So I think the “children’s books” in the future will be mostly made by people in the animation and gaming business today. And as the college store of the future requires less and less in the way of bookselling curation and management, those skills (which are what B&N have) become less and less important too. Maybe Walmart or Staples will have a division running college stores when they’re mostly about beer mugs and sweatshirts. Certainly, they’d be able to compete. Book management expertise is a subtle skill, but a sophisticated one. Remove it from the equation and you get a completely changed competitive environment.

      Mike

  • philipturner

    Good post, Mike, on the topic that’s been on my mind this week, since that disastrous investor call yesterday. In a different era, with Borders taken off the map, you’d have thought that B&N would be soaring, but obviously this is not the era to which we’d grown accustomed (Not to mention that Borders was taken down in this new era, not the old one.) Like a tennis match, I’m enjoying the volleying between Mike and Peter. Nothing else to add right now.

    • http://idealog.com/blog Mike Shatzkin

      I think B&N and the indies have gotten a lift from Borders’ disappearance. So has Amazon. And all the publishers have, net net, suffered.

      Mike

  • Anna Erishkigal

    B&N’s nook sales tanked because B&N loaded up their ebooks with so much DRM that if you buy your books .epub from a variety of e-platforms, you can’t access a book you just bought from them without finding someplace with wireless access and re-entering your credit card number. And when you call to figure out why you can’t read the book you just bought, you get the runaround.

    Sorry … go to the store couple of times a month, but I will never, ever buy another ebook from them again. Customers complained … and they ignored them. I buy all the books I read on my NOOK from Smashwords or Kobo now.

    • http://idealog.com/blog Mike Shatzkin

      Anna, your note seems to be internally contradictory.

      The problems you have come from buying books for your Nook from *other than *B&N sources in the first place! I do understand the DRM barriers doing things that way can create, but it is a bit confusing that your solution is to load your Nook from Kobo or Smashwords, rather than from the Nook store. My wife reads on a Nook and always buys her ebooks from B&N and never has any problems. Of course, she still complains about their lousy *search engine* (most recently, not finding a book because she got one letter wrong in spelling the author’s name), but she doesn’t have problems loading Nook-purchased books on a Nook device. If you wouldn’t either, why would you then buy from Kobo or Smashwords, unless it were a book you couldn’t GET from Nook (or if it were more expensive from Nook…)?

      Mike

      • Anna Erishkigal

        Dear Mike:

        If you buy a popcorn maker at Walmart, does that mean you are somehow obligated to buy the popcorn, itself from Walmart as well? Or will you buy it at Walmart if on sale, and Stop & Shop or some other store if you see a sale and wish to snag a different brand?

        There is nothing internally inconsistent about it. I want an e-reader, not a long-term marriage with Barnes & Noble or some other nameless, faceless corporation who is out to maximize profits by locking me to their distribution platform. It is this presumption of a long-term commitment on the part of B&N, the arrogance of it, that they can dictate who we do and do not buy books from, which is the reason for their downfall. I want a good book, reasonably priced, and NO DRAMA when I try to open the file and read it. Drama = lost customer.

        Once you know how to sideload books onto your e-reader using Adobe or Calibre, you can buy from anywhere.

        And THAT is why all 3 of my grown children got open-source Google Nexus 7’s for Christmas, not Nooks, even though I love my little Nook. Why would I want to encourage my children to enter into a long-term relationship with a controlling e-book distribution platform? And one which is clunky, at that? No … B&N is tone deaf … and from your perplexity they STILL don’t understand why customers bought their Nooks and went elsewhere.

        I bought a Nook … not a controlling husband.

        Anna

      • http://idealog.com/blog Mike Shatzkin

        I think you’re missing my point.

        I am *not *saying that anything is good or bad, right or wrong. I’m not saying B&N shouldn’t reconsider their DRM scheme. What I AM saying is that you’re saying that buying from sources other than Nook causes you problems with your Nook, and your solution to that is to…wait a minute…buy from *other
        sources*! Now, I’m appreciating that somehow Kobo and Smashwords are delivering you ebooks that your Nook can process and other non-Nook vendors (who? Google? Apple? AllRomanceebooks.com?) are giving you problems loading on the Nook. So, I wonder whether the problem is Nook or whether the problem is the files that these other non-Nook vendors give you are somehow to blame. It would seem, superficially, that if Kobo and Smashwords can give you files that work on your Nook and other non-Nook vendors can’t, then the first thing to question is the file source, not the Nook. You’re blaming B&N for locking you in. Do you think they did something different to make it okay for Kobo and Smashwords but not okay for everybody else?
        Honestly, except for the righteous resentment against B&N’s platform (which comes through loud and clear), I’m not following the message.

        Mike

  • http://thenoodledbrain.tumblr.com/ Vicki Fox Smith

    When I read about the difficulty B&N is having, I can’t help but be reminded of the reasoning behind the decision to “sell” Kobo to someone with very deep pockets. We were told that they knew that it would be necessary to dig in for a number of unprofitable years as Kobo built for a future emphasizing a significant international presence. They also seem to have decided not to concentrate much effort going against Amazon (or B&N) in the US.

    Will it work? I think it is too early to tell.

    • http://idealog.com/blog Mike Shatzkin

      It has seemed for a long time that Kobo has a business model that is perfectly comfortable with being the 3rd or 4th largest ebook retailer in the US. Of course, they are now owned by a company with very deep pockets so their resource constraints — the extent there are any these days — are strategically determined, not real. I don’t know as much as I should about Rakuten’s business, but Kobo has strategic value, not just immediate cash-implications value. Or it’s perceived that way. The Kobo leadership has always been the most accessible and willing to engage with industry thinkers of all the global retailers. They’re scrappy underdogs. They try harder.

      I’m not a technology whiz, but it seems to me that the running cost of a global ebook operation is trivial compared to its set-up cost. And that being able to run a truly global operation, as opposed to one that it is mostly in one place (B&N) or being opened up in a sequence based largely on the exigencies of another business (just about everybody else) leaves room for them to get established in a way that will have enduring value.

      What’s interesting, if you think about it, is how durable the global ebook competitors would seem to be. You have Amazon. Google and Apple will maintain global ebook retailing operations because of the value it gives them in other businesses. Kobo is building a solid global base. Nook, with no strong international presence, in the face of these competitors, really has its work cut out. But it would seem that the ebook retailing infrastructure, for the most part, is a strategic play by a larger entity that can’t really make enough money or lose enough money to change the larger entity’s world. Except in the case of B&N.

      • http://thenoodledbrain.tumblr.com/ Vicki Fox Smith

        Have you read the book _Marketplace 3.0 Rewriting the Rules of Borderless Business_ by Hiroshi Mikitani, Rakuten’s CEO ? What they are doing with Kobo now, and why Kobo was initially so attractive to Rakuten seems right on point.

        I found it interesting to see that recent Kobo numbers included the information that 15% of their ebook sales are in the US. They might have a smallish piece of the pie, but that must still be a great deal of cash without much in the way of expensive efforts.

      • http://idealog.com/blog Mike Shatzkin

        Well, Vicki, there are different ways to read that number. It could mean that their sales everyplace else, even though 5-2/3 times more than the US, don’t add up to all that much! But the ebook world is far less developed in those other places. So, the optimistic (and probably, right) way to look at it is that they are getting 15% of their sales in the most mature part of the global market and 85% in the parts of the global market more likely to grow quickly in the future.

        Mike

      • http://thenoodledbrain.tumblr.com/ Vicki Fox Smith

        I screwed up the stat, Mike. Their May 2013 report stated that 15% of their new user base in 1Q 2013 was in the US–not 15% of sales.

        From the release: http://tinyurl.com/knboa79

        “Kobo, a global leader in eReading, today announced double-digit Q1 year-over-year growth across its device and content sales resulting in a 98 percent growth in revenue. In the first quarter, the company grew its user base by 2.5-million Readers bringing its total registered users to 14.5-million with 15 percent of its new user base coming from the US. At the same time, Kobo’s customers are reading 34 percent more in Q1 compared to the same time period last year.”

        Now, this does not address profits (or losses) for Kobo during that period of time. Apparently the loss of blockbuster hits didn’t hit Kobo as hard as it did BN.

      • http://idealog.com/blog Mike Shatzkin

        Thanks. Hard to tell what that means without knowing how much of their prior user base was in the US. And even if we did…

        Mike

  • Pingback: Rassegna stampa culturale straniera – 190

  • Pingback: Barnes & Noble’s secret to success « Liquid State

  • Pingback: Post-it (bulimico) del mese di agosto