Seven Advantages Barnes & Noble Has in the Bookseller Wars

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By Thad McIlroy, The Future of Publishing, @ThadMcIlroy

Editor’s note: Today we will present advantages that Barnes & Noble has in the bookseller wars. Next week  we will present Barnes & Noble’s weaknesses in the bookseller wars. See second editor’s note below.

With over 1,200 college and retail bookstores across 50 states, Barnes & Noble is the No. 1 bricks-and-mortar book retailer in America. After nearly a century in bookselling, the company is currently staffed with 35,000 employees. Barnes & Noble stores average 25,000 square feet and carry up to 200,000 titles along with a wide selection of music, DVDs, magazines and toys and games, all according to the company’s website. Additionally, Barnes & Noble Cafés pour 60 million beverages, bake six million cookies and scones, and grill three million sandwiches annually.

As the last man standing in the 30-year war of the chain bookstores it has 40 million customers with a stake in its future.

In Amazon.com, Barnes & Noble faces a tough competitor. If business is war, Jeff Bezos is a battle-tested and decorated general. As popular as the Nook eReader is, the Kindle is much more so. As cheap as Barnes & Noble might price its books, Amazon often undercuts them. If Barnes & Noble stakes out a new market, Amazon follows the charge, guns blazing. Barnes & Noble declined to comment for this article (see second editor’s note below).

Given the state of the company and of its competition, what are the advantages it has in the bookseller wars?

For more insight into Barnes & Noble, hear Theresa Horner, vice president of digital content at Barnes & Noble, speak at Digital Book World, January 23-25 in New York City.

 

1. Good management with deep bench strength

In January 2009, Barnes & Noble appointed 38-year-old William Lynch as president of its online division. He brought to Barnes & Noble some sorely needed skills in online marketing. Just over a year later in March, 2010, Lynch was promoted to CEO of all three of the company’s divisions (online, college and trade retail).

Lynch presumably had his first taste of e-books while working at Palm from 2000 to 2004. It may have given him some unique insight into the value of its e-book related businesses. Barnes & Noble announced the acquisition of Fictionwise for $15.7 million in cash on March 5, 2009, a deal that “was completed in less than 100 days.” Lynch had joined the company three months earlier. Fictionwise owned eReader.com, which had been part of Palm from 2001 to 2003.

In 2004, Lynch founded Gifts.com as part of Barry Diller’s IAC. His last job prior to joining Barnes & Noble was as executive vice president of marketing and general manager of HSN.com (spun off from IAC in 2008). As TechCrunch reported, “In short, he’s all about digital.”

Announcing Lynch’s promotion to CEO, Barnes & Noble chairman and controlling shareholder Len Riggio told the New York Times, “by appointing him it sends a signal to the marketplace that we are serious about the business and the way this business is evolving.”

Lynch is well-compensated for his efforts at Barnes & Noble. He earned $15,709,965 in 2010. That is nearly a million dollars more than William R. Johnson earned as president and CEO of H.J. Heinz. His salary for 2011 is $1,603,181 (plus the vesting of previously-designated stock options). In an SEC filing on December 13, 2011, Lynch recorded receipt of options for a million shares in Barnes & Noble at an exercise price of $16.

Since joining Barnes & Noble Lynch has been gradually and deliberately adding to his operational management team. His hires built their careers in technology and online services, not selling books. Lynch has worked with many of them before.

Prominent on the team are:

•    Jerram Betts, vice president of Internet marketing; directed SEO efforts at Shopzilla.

•    Sara Bial, vice president of product management and creative; was director, product management (eCommerce) at HSN.com with Lynch.

•    John Foley, president of eCommerce; founded Pronto.com and was president of Evite.com.

•    Lee Huang, product director of the digital newsstand and emerging content; was director, digital strategy at NBC Universal.

•    Chris Peifer, vice president of business development; was a founder of e-Government SAAS firm SOE Software.

•    Marc Parrish, vice president of membership and customer retention marketing; was CEO and co-founder of StockphotoPro after working at Palm.

•    David Rowland, chief technology officer of BN.com; held positions at Electronic Arts and Gifts.com.

•    Liz Scheier, editorial director of digital content; joined Barnes & Noble from Scrollmotion, which offers “end-to-end solutions that help companies create and distribute across digital devices” and was a senior editor at Random House and an editor at Penguin.

•    Tim DeSoto, director of business development and content acquisition for the digital newsstand; was director of business development at Dow Jones.

•    Jeff Snow, director of sales and marketing; worked with Lynch at Gifts.com.

•    Roger Webster, chief architect, “responsible for rich, interactive content on the Nook color;” was a senior software engineer at Adobe Systems for eight years.

Tactical execution remains a top challenge for Barnes & Noble. Time and again Amazon gets the leap in new programs and product promotions. Though much of the publicity was unfavorable, Amazon’s recent Price Check app stunt certainly reinforced its positioning to consumers as the low-cost shopping destination.

 

2. The market for digital media devices is exploding and so is the demand for digital media to run on those devices

Markets for digital books are growing fast. Tablets are taking off, as have e-readers. E-book sales will increase in proportion to all of the new devices, and as smartphones get better, e-books and other digital content will increasingly be purchased there as well. Barnes & Noble, with its popular devices and sales and marketing engine, is well-positioned to capitalize on this growth.

A September forecast from Juniper Research, a UK-based research firm, projects tablet shipments will reach 253 million by 2016, a five-fold increase from the 55.2 million tablets projected for shipment in 2011. A November report from the same firm forecasts that despite the growth in tablet sales, e-reader shipments will reach 67 million by 2016, nearly triple the 25 million estimated to have been shipped in 2011.

E-book sales have followed a dramatic trajectory since Amazon launched the Kindle in 2007. The numbers most people associate with the explosive growth appear on the often-reproduced IDPF chart that covers 2002-2010. Sales grew from $20 million in 2006 to a run rate of about $450 million in 2010 (and these were just wholesale numbers from a subset of U.S. publishers).

Barnes & Noble’s latest financial filing for the first half of fiscal 2012 through October 29 states that comparable online sales “increased 38%, on top of a 59% increase a year ago…driven by continued growth of digital content sales and purchases of award winning Nook devices.”

A report from the Yankee Group predicts that “e-book sales will grow at a compound annual growth rate of 72% to reach nearly $2.7 billion” by 2013. A report from Juniper Research states that (worldwide) “annual revenues from e-books “delivered to portable devices” will increase from $3.2 billion in 2011 to nearly $9.7 billion in 2016, an annual compound growth rate of 24.7%.

 

3. Liberty Media’s John Malone and Gregory Maffei are betting that Barnes & Noble is a winner

The word “legend” is often associated with John Malone and his flagship venture Liberty Media.

Liberty Media (and its associated investment arms) own all or part of Gifts.com, Expedia, Starz cable network, Sirius XM Radio, HSN and QVC, to name a few of the well-known firms. Malone is also the largest private land owner in America.

From the Liberty Media Investor & Analyst Meeting

Liberty Media didn’t make a $204 million investment in August 2011 in Barnes & Noble just for the 7.75% annual dividend it’s receiving for its preferred share. The company is a long-term strategic player with a superb track record. Under the leadership of John Malone the company has seen extraordinary financial returns primarily from investments in broadcast and cable TV. Grading Malone’s recent investments, The Wall Street Journal says of Malone’s Sirius XM play “it’s hard to think of an investment made anywhere, anytime that turned out better.”

On November 8/11 Gregory B. Maffei, president, CEO and director of the executive committee at Liberty Media, called Barnes & Noble a “strategic investment…we’re excited about the things they’re doing.” In his mid-November presentation to Liberty investors Maffei discussed various motivations behind its investment, including its profitable stores (with short-term leases), its college bookselling network and the benefit of top competitor Border’s liquidation.

According to a Spring report in The Hollywood Reporter, Liberty is focused on the value at Barnes & Noble and sees possible synergies between the bookseller and its other assets as “icing” on a cake (for instance, the QVC channel could sell Nooks).

Earlier this year when Liberty showed interest in acquiring the entire firm, Credit Suisse analyst Gary Balter wrote: “With strong backing of a media company like Liberty, we believe Barnes’s digital business will be able to compete more effectively with the likes of Amazon, Apple and others.”

 

4. The college store business marches profitably on

Barnes & Noble is a well-established and successful player in the college bookstore business, with 635 stores serving 4 million students. The stores are mostly school-owned and operated under contract by the B&N College division.

This is Barnes & Noble’s most profitable business segment. In the last fiscal year B&N College delivered a quarter of overall company sales and more than twice the operating profit of the retail stores.

In an interview with Ned May, who covers book publishing as vice president and lead analyst at Outsell, Inc., William Lynch said, “We operate over 600 of the country’s best college bookstores including Colombia, Yale, Harvard, Penn. As that format begins to move digital – and it is taking much longer than it is in consumer trade – we believe not only will we have great technology and great product experience but we also have the sales and marketing channel to drive our solution, Nook Study, to millions and millions of students…. We can play offense in digital education, but it is still very early.”

“The college bookstore market is a strong suit for Barnes & Noble,” said May in an interview with Digital Book World. “It also offers a stable, captive audience for the Nook.”

 

5. The Nook product family is competitive in a tough market

Amazon and Barnes & Noble have been battling for the top spot in monochrome readers since the first Nook appeared two years ago. The latest ratings from Consumer Reports show the various models still running neck and neck, with the Nook Simple Touch the current leader. The latest review on Wired gave a surprise win to Kobo, followed by Nook and then Kindle. There’s not a lot dividing the top players, and the Nook is always in the running.

Two Tablets Compete Head-On

It’s partly a matter of timing that pushed the Nook Color reader out of the running against the identically-priced Kindle Fire, forcing Barnes & Noble to fight back with the $249 Nook Tablet. Some reviewers have seized on the $50 price differential as a key factor to award Amazon an edge over Barnes & Noble. The range of content is another factor cited by reviewers. But reviewers who favor the Nook Tablet like the hardware extras: more memory, better battery life, and an excellent display. Where Amazon.com wins hands down is, as always, in marketing.

The Review Score Card

Review Source                      Winner
                                    Amazon    B & N    Tie

CNET                                                    X
eWeek                                                             X
Fortune                              X
PC Magazine                                                 X
Philadelphia Inquirer                                   X
TabletPCReview                                X
USA Today                        X
ZDNet                                                              X

 

6. Kid’s books and women’s romances are solid niches for Barnes & Noble

Barnes & Noble has carved out two successful e-book niches: romances and kid’s books. This past fall, the company extended the kid’s franchise into toys and games. It’s difficult to measure the bottom-line impact from these two markets, although analysts have noted the Nook as a favorite among women buyers, and Barnes & Noble has been advertising consistently to this market.

“Barnes & Noble got a jump on both Amazon and Apple’s iBookstore by focusing on kids with a parent-friendly UI [user-interface] and by being the first vendor to include enhanced features – animations and activities,” said Sara O’Hearn, director of content at Panarea Digital, a Sao Paolo-based digital content production company (disclosure: O’Hearn is the author’s sister). “They’ve released scores of kid’s favorite picture books and parents don’t have to buy a separate app to download them. Amazon is getting to this market a year after B&N launched their first round of illustrated e-books.”

The Barnes & Noble store is also easier for kids to figure out than the Kindle store, according to O’Hearn, who has supervised porting over 500 children’s books in a variety of sizes and formats, incorporating audio, animation, and interactive activities to Barnes & Noble Nook Color.

In Barnes & Noble’s December 1 conference call with analysts, Lynch pointed out that the company is focused “more to the higher-end educational toys and games. After a strong launch on ‘Black Friday’ the momentum in toys and games has sustained.”

 

7. Barnes & Noble stores are showcases for physical books and hubs for community

Barnes & Noble is learning how to use its bricks-and-mortar presence to great effect, while at the same time expanding Nook distribution well beyond its own stores into retailers like Best Buy and Wal-Mart. With Borders dead and buried, Barnes & Noble is the last man standing. (Books-a-Million, its only retail bricks-and-mortar competitor, is a distant second with 200 stores.) The company’s strategic importance grows for the big publishers as it becomes essentially the only place to showcase new printed books.

Community reinforces bricks-and-mortar. As Barnes & Noble states on its website: “We pioneered the concept of a retail store as a community center, and annually host approximately 100,000 community events nationwide.” It’s hard to put a number on the value of these events, but for authors and publishers, well-organized appearances at Barnes & Noble stores are very much a part of the sales and publicity engine.

When William Lynch presented to the Liberty Media Investor & Analyst Meeting in mid-November he pointed out that the Barnes & Noble network of prime retail locations is its “biggest competitive advantage.” This fall the company introduced new “Digital Shops” in 40 stores, designed to be “the preeminent place for consumers to learn about e-books, get their newsstand subscriptions, learn about new types of content coming down the pike, and learn about our Nook products,” according to Lynch, who added that there would be 100 more next year.

To be sure, this advantage may be eroding, as Barnes & Noble continues to close stores.

When Barnes & Noble surveyed Nook owners as to why they bought a Nook over a Kindle, the No. 2 reason was the in-store support (he didn’t reveal what No. 1 was).

Maybe most importantly for Barnes & Noble’s bricks-and-mortar retail presence, Liberty’s John Malone was quoted May 23, 2011 in The Wall Street Journal saying, “I’ve been a Barnes & Noble customer myself for many, many years. The stores will shift around, but there will be a physical presence for a long, long time to come, and it will be a profitable presence.”

Write to Thad McIlroy

Thad McIlroy is a publishing consulant and analyst who makes his home at thefutureofpublishing.com.

 

Editor’s note No. 2: For this article series, we repeatedly contacted Barnes & Noble communications executives asking at first for access and participation and then, most recently, merely for comment. After being ignored for many weeks, we finally received response that Barnes & Noble would not be participating in the article. We were given links to publicly available resources about the company. We have also received no response to a fact-checking email intended to verify the facts presented above.

As a journalist, I find it disturbing that a publicly-traded company would refuse to engage with members of the press. Strategically, I think it’s silly that Barnes & Noble, which is, quite frankly, struggling in the public relations war against its chief rivals would treat the possibility of talking to an important industry publication with so little regard.

I still welcome comment from Barnes & Noble. I can be reached via email here or at 212-447-1400 x12266. The lines are open on our end.

For more insight into Barnes & Noble, hear Theresa Horner, vice president of digital content at Barnes & Noble, speak at Digital Book World, January 23-25 in New York City.

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12 thoughts on “Seven Advantages Barnes & Noble Has in the Bookseller Wars

  1. As an eBook author I’d be alarmed to see Amazon take a greater share of the market. Granted Amazon have empowered me in many ways but that empowerment comes with a price when they have such market dominance. Realistically that empowerment came from the net, not specifically from Amazon. Listing print on demand books as out of stock or difficult to source was disingenuous when other on-line retailers listed my books accurately. Being told to leave your credit card details for when the book becomes available just discourages sales and they have such market dominance on-line that readers simply don’t look elsewhere. Due to this behaviour I’ve been forced to withdraw from the PoD market to concentrate on eBooks. If Barrns & Noble go the same was as the major UK high street retailers we will all be impoverished.

    • @Jack Barrow
      I see you’ve got your books on both Amazon and Barnes & Noble. Good for you — you’re capturing additional sales that some ebook authors are leaving on the table. As for Barnes & Noble’s fate: all will be revealed in next week’s installment!

      • @Thad_McIlroy Guess what? If we indie authors had been “capturing extra sales” at the table more of us would have stayed. I am exclusively on Amazon because it’s where *I* can get sales and readers. It’s a choice between a rack next to the checkout counter with Amazon or a rack in a dark corner in the back of the store with B&N.

        Not that I wish them ill, and I don’t see much in that article about how GOOD their bookstores are. Hm… Well, when I shop at a physical bookstore it’s at Powell’s.

  2. I enjoyed this article. But I think you left out to very important advantages that Barnes and Noble has:

    Adherence to applicable standards

    Epub, Android, and ARM

    These three formats have emerged as THE standard for ebooks, mobile applications, and chip architecture. Barnes and Noble was smart to build it’s nook platform on all three of these standards from day 1. In fact- you could say the original nook 3G was the first android tablet- even beating the Ipad to the market.

    While Barnes and Noble does not control these standards- epub is owned by a non-profit standards committee android is owned by Google, and ARM is it’s own company – simply building the platform to adhere to them greatly reduces the chances that the product will become irrelevant.

    Developers, authors, and contract manufacturers do not need to learn special skills or perform conversions on their product simply to become compatible with Barnes and Noble’s product. The upshot is that market share alone is NOT a risk factor for the nook. As long as they can continue to distribute the product in large quantities, there is little natural incentive for suppliers to abandon support for it.

    By contrast, Apple uses iOS for it’s apps, and Amazon uses mobipocket for ebooks. Proprietary formats are fine as long as the respective products sell well and they maintain a very high market share – but they can just as easily send the product into a death spiral if market share drops. Digital suppliers need to invest extra time and energy to convert their digital products into a format that can be sold on those platforms, and if the majority of your sales are elsewhere, than the extra effort becomes a reason to ditch. This is what happened to the Microsoft zune (Windows phone was not the standard for applications), Blackberry, the HP Touchpad, etc.

    It’s worth noting that the nook is not open from the consumer standpoint. Proprietary DRM and the inability to sideload apps from third party sources mean that the consumer is still effectively locked-in. But this is a business decision, not a technical liability. It doesn’t inhibit their ability to make a great product.

    • I believe strongly in standards, but need to point out that Barnes & Noble’s implementation of EPUB uses proprietary DRM, such that it’s impossible to read B&N book purchases on other EPUB devices or using other EPUB software. And, like Amazon, B&N uses Android mainly to short-cut OS development costs, not to strive for openness or a standards-based approach.

  3. As the manager of a college bookstore for 25 years, I’m not so sure about the #4 advantage. Amazon is making a huge push for the college textbook market – selling many of the most popular (and very expensive) titles at below publisher net. In addition, Amazon now offers buyback pricing directly to students that will pay them considerably more – in some cases double or even triple – than would a standard wholesaler-sponsored student buyback.

    I also think Ned May is off the mark in his assumption that operating college stores makes the students at those schools a captive market for the Nook. Hey, the Nook is an excellent product, but there’s already multiple ways to get your etextbooks. Short of giving away the Nooks (which might not be a bad idea) I don’t see how anyone is going to force the choice of hardware platforms.

    • I’m inclined to agree with you that students at college stores are still more likely to buy an iPad (if they can afford it) than a Nook tablet.

      Amazon has entered the digital textbook space, but, as far as I can see, very half-heartedly. CourseSmart and Kno, and now Chegg compete with more energy for digital texts, and clearly the days of selling printed texts at healthy margins are numbered (although it’s still years, not months before they’re gone).

      But when I considered this advantage I was thinking of two things:
      1. The business has been solidly profitable for B&N (although in its January announcement it did raise a cautionary flag for the next fiscal reporting period)
      2. Even as textbook sales flag the stores will find other merchandise to market to students. And I assume that B&N will be able to use its scale and operational expertise to continue to be a player here.

  4. I believe they need more aggressive marketing of the Nook. As an ebook publisher and distributor in several markets, we have noticed a slip in sales through B&N while other markets are growing aggressively. We have also noticed that every time they do an advertising push, our sales jump accordingly- which tells us it works.
    B&N has by far, the best uploading platform and metadata forms, they are a jewel and seem to not quite recognize their full potential in the digital market.

    • @Carolyn
      I agree. But as I point out in the follow-up article looking at B&N’s challenges, Amazon has done a much better job wooing authors, such that @JRTomlin can crow that he don’t need no darned B&N.

      B&N is playing against a ruthless online player — I don’t envy them the challenge.

  5. As a small Australian based publisher B&N seems to me to miss the whole point of the digital market place and product. We can’t access B&N directly but are on there but with delayed updates etc, and no control over the quality of the format they are selling, and whenever I look it seems you still can’t buy anything from them here. To me they are way behind, they may sell a lot of books but for anyone outside the US are a bit of a none vent. Amazon and KOBO in comparison are fully here for publishers and customers.

    • @Stephen
      Yes, as I point out in the follow-on article, B&N has failed completely international and clearly now recognizes this. I personally think it’s too late for them to play catch-up on the international scene.

  6. http://booclips.com is the new way for children to read!

    A great combination of content (Kung Fu Panda, Hello Kitty, LazyTown, Garfield and more..), videos, Cool features, and the fact that it is available for all platforms (Nook, iPad, PC, Mac, Android) makes it a perfect way to read.

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