Future Uncertain for Barnes & Noble and Other Booksellers Following Justice Department Lawsuit

By Jeremy Greenfield, Editorial Director, Digital Book World, @JDGsaid

Barnes & Noble and other booksellers will have a tough time competing with Amazon following the Department of Justice’s lawsuit against Apple and some of the largest U.S. publishers, say some in the publishing industry.

With the renewed ability to set prices on more e-books that it sells, Amazon will resume discounting of some best-selling e-books and selling them at a loss, putting price pressure on other retailers.

Amazon itself came out with a short statement saying as much following Wednesday’s announcement by the Justice Department that it had filed a lawsuit against Apple and five of the largest U.S. publishers for colluding to fix the prices of e-books: “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” said Amazon spokesperson Drew Herdener of the settlement three of the five publishers made with Justice, which many think will return them to wholesale pricing in which the retailer – not the publisher – sets the price of e-books.

“Amazon has just had a weapon – price – put into its arsenal that it had lived without for two years,” said Mike Shatzkin, a book industry consultant (and partner with Digital Book World on the Digital Book World Conference in January). “They’ll use it and every competitor they have will suffer. Barnes & Noble is likely to have problems mustering the resources to fight the price battle while they’re also trying to keep stores open and develop their own technology.”

Stock in Barnes & Noble was trading at $12.06 at the open of the markets on Wednesday, plunging 8% as news on the Justice Department lawsuit and the settlements broke to a low of $11.00. The stock rallied later in the day, but ended down.

An unusually large number of Barnes & Noble shares changed hands on Wednesday – nearly six million – versus the average daily volume over the past three months of 1.3 million. The stock resumed its fall on Thursday, closing at $10.97. As Digital Book World went to press, Barnes & Noble stock was down 4.37% in early trading to $10.50.

A Barnes & Noble spokesperson said that the company had no comment when asked to about the lawsuit and its Nook e-book business.

It’s not just Barnes & Noble under pressure, say observers.

“You take any company in the book retailing business, they can’t compete with Amazon,” said Lorraine Shanley, president of Market Partners International, a New York-based publishing consultancy.

The belief among some in the publishing community is that Amazon will begin discounting best-selling e-books at levels that other retailers can’t afford, selling each one at a loss. If Hachette, for instance, sells an e-book to Amazon at $14.99 and Amazon re-sells it for $9.99, taking a $5 loss on each copy sold, other retailers will be pressured to match Amazon’s price, losing money on each copy sold.

Unlike Amazon, which had $48 billion in revenue in 2011, most of it not from selling books, other booksellers need to make a profit on bookselling.

“Kobo’s new owners [the Japanese e-tailer Rakutan] are going to have to dig deeper into their pockets to finance an upstart competing on price. Apple is either going to have to devote a lot more time and bandwidth to running a store than they have before or face total irrelevance. The challenge grows for everybody else as well: Blio, Copia, the soon-to-open Bookish, and other upstarts on the runway,” said Shatzkin.

Of course, it all depends on what Amazon does.

“Nobody knows what the new order will look like,” said a source at a publisher named in the lawsuit who works on e-book pricing and wanted to remain anonymous. “What happens with price depends on whether Amazon goes predatory. The more flexibility Amazon has to be aggressive, they may ultimately lower prices for consumers, but, as a result, we may lose Barnes & Noble.”

To be sure, not all industry observers are predicting doom for the nation’s leading bricks-and-mortar bookseller.

“Barnes & Noble has to become a retailer of stuff other than content and devices if it wants to survive,” said James McQuivey, Ph.D. and principal analyst at Forrester Research who covers the book industry and told Digital Book World yesterday that Amazon may lower its e-book prices slowly. “William Lynch [CEO of Barnes & Noble] is smart and he has to say, ‘we have to be a lifestyle retailer, rather than a bookseller.’”

And Barnes & Noble may be able to compete with Amazon in other ways. According to Thad McIlroy, a Vancouver-based digital publishing consultant who has written about the bookseller for Digital Book World, Barnes & Noble scored a huge success with a Hunger Games promotion in which it gave away two free tickets to advanced screenings of the movie to those who purchased a Nook in select Barnes & Noble locations. The company also made a splash this week in releasing a new e-ink e-reader with a built-in reading light, a first on the market, according to Barnes & Noble.

Barnes & Noble is also reportedly launching an international expansion of its e-reader and e-book business, which will expose its devices and content to a growing international e-book market.

It could be too little too late, said McIlroy, who recently published an e-book about the retailer’s plight called Stripping Covers Off The Hunger Games: How 7 Billionaires Control the Future of Publishing in America.

“They’ll get a toe-hold in the UK, although they don’t have any international operational expertise. They’ve been hiring for it, but Amazon is a million miles ahead of them, as is Apple, as is Kobo,” he said.

Meanwhile, shares in the nation’s second largest bricks-and-mortar books retailer, Books-A-Million, are down 14% to $2.63 since an early-Wednesday high of $3.06.

Write to Jeremy Greenfield

Complete coverage of the Justice Department e-book lawsuit on Digital Book World:

Analyst: Amazon Will Lower Kindle E-Book Prices Slowly, Strategically

Amidst Justice Department Lawsuit, Kindle E-Book Prices Rise Sharply

Compliance Requirements for Publishers That Settled: Everything But Ankle Monitors

On the Dinner Menu: Fishy Discussions about “$9.99 Problem”

Hachette Settles With DoJ, Admits No Involvement in Conspiracy

Statements From DoJ’s Eric Holder and Sharis Pozen on DoJ’s E-Book Price-Fixing Suit

HarperCollins Settles With DoJ Over Pricing

Lawyer Who Filed Complained Against Apple, Publishers makes Statement on DoJ Suit

Deep Dive Into DoJ Suit

Macmillan CEO John Sargent: ‘Macmillan Did Not Collude’, Macmillan to Fight DoJ Suit

Department of Justice to Make Announcement on ‘Significant’ Antitrust Matter Today

As Macmillan, Apple Prepare for Lawsuit, Justice Department Is Open for Last-Minute Talks

 

 

9 thoughts on “Future Uncertain for Barnes & Noble and Other Booksellers Following Justice Department Lawsuit

  1. Christopher Wills

    How can Amazon sell an ebook at a loss? That implies there is some cost to creating an ebook. The statement sounds suspiciously biassed towards the traditional publishing model where it is assumed that $9.99 or whatever is an acceptable price to sell an ebook that cost less than one cent to create. It’s just this kind of head in the sand thinking that is going to kill traditional publishers. The sooner they realise the gravy train has stopped and that they should enter the 21st century the better for all writers and booksellers.

    Reply
    1. Jeremy Greenfield Post author

      Hey Christopher —

      Great question. The way the wholesale model works is that publishers determine the price to charge Amazon for an e-book and Amazon determines the price to charge the reader.

      So, if a publisher sells Amazon a copy of an e-book for $15 and Amazon re-sells it for $10, then Amazon is taking a $5 loss on the sale. This is a practice that Amazon and other e-tailers have reportedly used to try to gain customers.

      I think what your comment is getting at is that most people don’t think e-books cost anything to create. While it’s true that you don’t have to print e-books on paper or ship them in trucks, there are other costs associated with creating them.

      You have to have a team of software developers code and check the quality of the book. You have to have to pay a distributor to distribute the e-book to the hundreds of e-bookstores out there. You also have to pay what are known as “co-op” marketing costs to Amazon and other e-tailers to promote the book. There are also other costs involved that are unique to e-books.

      The only guess I’ve heard is that it costs about 80% of what it costs to make a print book. I have no real idea how accurate this is.

      So, I would wager that it’s true that producing and distributing e-books costs less than doing the same for print books, it doesn’t cost “less than one cent.”

      Thanks for the comment!

      Reply
    2. Grant P

      They sell at a loss because they still have to pay the publisher a wholesale price for an ebook. This settlement allows them to sell below cost, meaning they can capture the market for the their Kindle editions etc. This is bad for competing distributors, and it’s potentially bad for both publishers and authors who will have to deal with Amazon on its monopolistic terms.
      Contrary to public perception, most of the cost of any book — especially an expensive book — lies not in its reproduction or distribution costs but rather in the value of the content, which is the same for both electronic and print editions. Once the competition is eliminated, Amazon could again charge whatever the market will bear for particular content, and the smallish savings due to electronic distribution will accrue not to the publisher or the author but rather to Amazon.

      Reply
  2. gl2298@columbia.edu

    Christoper, I don’t know when the last time you created an ebook was, but the small publisher I work for pays a lot more than a cent to make ours. Most people who criticize traditional publishers on this topic seem to assume that every publisher is a huge, money making machine. Well, allow me to apprise you of a rather different reality than the gravy train you imagine.

    As a scholarly publisher, we go through a rather rigorous cost/price analysis when determining how many books we’re going to print. As part of that process, we have to factor in the conversion cost of creating the ebook, because we cannot yet afford to hire a room full of people to do this work ourselves. We’re working towards the having the ability to do so, but until we do, we have to pay someone else to do it for us. An then there’s the matter of our backlist of the 2000+ books from our backlist we’re working (paying) to convert to e. Yes, Christopher! It costs us money to create an ebook! And it’s not always clear that we’ll make that money back, but do you think we’re going to tell our authors that? So for us, the relative cost of an ebook is rather more expensive than for the typical gravy train publisher.

    So should we sing the praises of the Amazon/Justice Department decision? Or should we just \get with the program,\ realize that this is the 21st century, close our doors and tell our authors to take their manuscripts directly to Amazon?

    Reply
  3. Laura Howard

    Great debate! As a writer and a reader, I tend to think the big publishing houses need to try a new approach We all see Amazon as the monster here, but it’s business!! If those publishers had come up with the business plan Amazon has put in place, it’d be no different! Times are changing, and as the music industry shows us, lots of businesses are going the way of the dinosaur…rather than fight it, do something to keep up!

    Reply
    1. gl2298@columbia.edu

      Laura, in our case “doing something to keep up” means converting to e as quickly as we can, to help fight the erosion our print sales. But even with that, we’re still facing a net loss, as are many other publishers. This case is just another nail in our…hard cover.

      Reply
  4. gl2298@columbia.edu

    The folks at Amazon are probably buying extra mops to sop up all the saliva they must be generating when they hear things like “The more flexibility Amazon has to be aggressive, they may ultimately lower prices for consumers, but, as a result, we may lose Barnes & Noble.” New order, indeed.

    Perhaps one way to “fight back” would be for publishers to pull all their titles from Amazon. Sounds like suicide, but it would certainly get attention and drive some customers to B&N and others.

    Reply
  5. Laura Howard

    I believe it! I am completely on the side of the little guy. My problem here is that people call Amazon the bogeyman, but a few years ago didn’t Barnes and Noble make a business move that put a nail in indie bookstores coffins? And Apple?!? Don’t we have them to thank for indie record stores going away? We can’t change what will happen, hopefully you as a small publisher and indie bookstores will be allowed to adapt to what’s coming, because it’s a Shame to see all these big guys having all the fun.

    Reply
  6. Jeito

    Taking the ebook market will be more about how well the book comes alive and less about a cheap price.

    There are other considerations to make when purchasing an ebook that go beyond price alone. People are also thinking about value. The experience of a book on a digital device becomes more valuable because it offers something that picking up a book does not. Consumers are smart, and they know quality from garbage. While they like a deal, they also want something that inspires them, relaxes them, and delivers information with quality, ease, and convenience in mind.

    Think of the experience built into an ebook. Is it a simple black and white text version, or does it have beautiful pictures and embedded video, links, etc? If so, all ebook readers and apps are not the same. Some support these incredible features and others do not. Which would you prefer?

    Ebooks must be built for the technology each reader supports. Apple’s iBookstore supports interactivity that is not possible on other devices. So, do I want an ebook for $2.99 from Amazon where I have to read it on a Kindle, or in a separate app (the Kindle Reader) and lose the book’s interactivity? No. If I am buying an ebook, I expect to gain a better experience with the book beyond a static page. I am willing to pay more for that. Furthermore, chasing price would lead me to having three libraries via 3 apps (iBookstore, Kindle Reader, and Nook for iPad). Where is \Catcher in the Rye\?

    If I am an author, I am going to build the best experience for my reader on a platform that I can learn and is progressive – trusty iOS. Then, I can dumb down the ideal experience into a pdf or epub for others who don’t support technology’s current capabilities. I may choose to avoid publishing with Amazon altogether since they may devalue ebooks.

    So, if I were Amazon, I would be sure to keep authors happy and consumers happy. Give authors what they need to deliver amazing books and give consumers a GREAT product that they will respect and pay for.

    Reply

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