Case Study

Can This Bookstore Be Saved? Source: Laudon, KC & Laudon, JP 2014, Management Information Systems: Managing the Digital Firm, 13

th Edition, Pearson Education

Limited, England

Barnes & Noble (B&N) has been portrayed in the past as a big bully that drove small

independent bookstores out of business with aggressive pricing tactics and an unbeatable

inventory of books. Today, B&N finds its role reversed as the company fights a fierce battle

to survive in the inevitable era of e-books. Booksellers were one of the many industries

disrupted by the Internet and, more specifically, the rise of e-books and e-readers. B&N

hopes to change its business model to adapt to this new environment before it suffers a

similar fate as many of its competitors like Borders, B. Dalton and Crown Books, or their

peers in other industries like Blockbuster, Circuit City and Eastman Kodak.

More than ever, consumers are reading books on electronic gadgets – e-readers, iPods, tablets

and PCs – instead of physical books. Although B7N still depends on its physical, brick and

mortar stores to drive its business, the company has thrown its energies behind development

and marketing of the Nook series of e-readers and tablets. Once simply a bookseller, B7N

now styles itself as a seller of e-books, devices to read them on and apps that enhance the

reading experience. The company has had success gaining market share but at a steep cost,

and to stay afloat it will need to contend with increased competition from Amazon, Apple and

Google – not exactly feeble opposition. B&N has a market capitalisation of $1 billion.

Amazon, B&N’s current top competitor, has a market capitalisation of $98 billion. How can

B&N compete against these titans?

The answer remains to be seen. B&N was likely the only bookseller big enough to complete

the considerable task of developing an e-reader, marketing it, and setting up manufacturing

and retail operations for the device. Even if its competitors had been faster to react to

consumer demand for e-books, it’s unlikely they would have made the inroads that B&N has

achieved into the e-book space. Reaction to the Nook has been positive, as B&N has grabbed

a significant market share from Amazon and Apple in the e-book marketplace. In 2011,

analysts estimated that B&N controlled approximately 27% of the digital book market

(Amazon held 60%).

B&N’s progress with e-books has come at a steep cost, however. The company incurred a

loss of $73.9 million in 2011, compared to a $36.7 million profit the previous year. The

investment required to launch and promote the Nook was the primary reason for the shortfall,

and expenditures are expected to continue to climb. In response, B&N cancelled its stock

dividend. The key questions for B&N are whether the Nook will eventually bring in revenues

that justify its steep development and marketing costs, as well as whether the Nook can help

drive traffic to B&N’s brick and mortar stores.

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. Still, B&N’s Nook business has been

growing rapidly and traditional bookstores are not. Total e-book sales were nearly $970

million in 2011, more than double from the previous year, and the percentage of e-books

within the total number of books sold is still on the rise, measuring 14% that same year.

Ironically, one of the first companies to realise the potential of e-books was B&N itself. As

early as 1998, the company had partnered with software companies like NuvoMedia to

develop a prototype e-reader called the Rocket, but in 2003 it nixed the project because there

didn’t appear to be any money in it. At the time, B&N was right, but technology has come a

long way since 2003, and so too have e-books.

B&N clearly took notice of the fate of Borders, its chief rival. Borders stubbornly refused to

adapt to the Internet, first handing over its entire Internet operations to Amazon and waiting

to relaunch its own Web site until 2008, at which point the company was already on the road

to bankruptcy. Borders had a devoted following, but it wasn’t enough to combat the

company’s $350 million debt and dwindling profitability. B&N is the only national

bookstore chain remaining in the United States and while the company saw a bump in store

traffic in the immediate aftermath of the Borders collapse, it also know it would need to

shake things up to avoid a similar fate.

Other companies also have a stake in B&N’s transformation. Publishing companies have

been forced to adjust their allocations of printed books and new titles for stores and books are

beginning to be released as apps in addition to physical books. Apps for books are adding

more features all the time, including the ability to manipulate and enlarge images, flip

through photo albums, watch videos, read instant messages and listen to the music of

characters within the book. These books, called “enhanced e-books” are considered to be the

next step in the growth of digital books, but thus far, the performance of enhanced e-books

has been mixed.

Publishers and e-reader manufacturers both are teaming up on enhanced e-book projects.

Penguin will release 50 enhanced e-books over the course of 2012. Apple is working with

publishers to create interactive digital versions of textbooks. But do readers really need these

features? Some publishers believe that these apps cost more money than they are worth and

worry that there is not a big enough market for enhanced e-books to justify the expenditure of

time and money. However, this is the same line of thought that was used about e-books

themselves in the early 2000s and e-book sceptics turned out to be dead wrong.

Publishers are doing anything they can to support B&N’s efforts to stay afloat because the

survival of physical book retailers is important to effectively market and sell books.

Bookstores spur publisher sales with the “browsing effect”. Surveys have shown that only

one third of the people who visit a bookstore and walk out with a book actually arrived with

the specific desire to purchase one. 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 in this country 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. 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 prices is not a tenable business model for publishers in

the long term.

Publishers received even worse news in April 2012, as the US Department of Justice (DOJ)

sued Apple and five of the country’s largest publishing houses for colluding to fix e-book

prices. In response to Amazon’s aggressive pricing strategy, publishers and Apple had

agreed to an “agency pricing” model, in which publishers set the price and retailers take a

commission. Under the wholesale arrangement with Amazon, the publishers received half of

the list price, but this gave them no control over the pricing of their product. Many books

would be sold by Apple for about $13, with Apple taking a 30% cut. By increasing the price

of e-books by a dollar or two, publishers stood to gain an extra $100 million. Even Amazon

was under investigation for striking deals with publishers that forbade them from offering the

same level of discounts provided by other e-reader manufacturers. The bottom line is that the

DOJ action is bad news for publishers, who need B&N now more than ever.

Because the Nook was booming and brick and mortar stores had been stagnating, B&N has

been considering spinning off its digital business from its fading bookstore business. On

April 30, 2012, Microsoft announced that it would invest $300 million for a 17.6% stake in a

new company consisting of B&N’s Nook tablet and e-reader business and its College

division. As part of the deal, a Nook application would be included in Microsoft’s Windows

8 operating system. This arrangement will provide B&N with additional points of

distribution from hundreds of millions of Windows users around the world and both

companies will share revenues from sales of e-books and other content. B&N might

eventually spin off this new company.

The deal also furthers Microsoft’s strategy of investing in new businesses to move beyond its

Windows and Office software franchises. A Nook e-reading app could also enhance

Microsoft efforts to establish a digital storefront to market e-books, apps and other content

for Windows 8, which is critical to plans for entering the tablet market.

B&N has also experimented with ways to drive traffic to their physical stores using apps on

the Nook. Although this is a seemingly impossible task, they are at least coming up with

some inventive ideas. 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. Other companies are using similar

techniques to promote board games, toys, movies and, of course, physical books. B&N has

also expanded its store space for toys and games and added new display space for its Nook

devices. There are also plans to experiment with slightly smaller stores.

These promotional campaigns probably won’t be enough to stop B&N’s dwindling in-store

sales. What 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.

Questions 1. Describe B&N’s business model and strategy as it has changed since its creation.

2. Use the value chain and competitive forces models to evaluate the impact of the

Internet on book publishers and book retail stores such as B&N

3. How are B&N and the book publishers changing their business models to deal with

the Internet and ebook technology?

4. Will B&N’s new strategy be successful? Is there anything else B&N and the book

publishers should be doing to stimulate more business?

5. How do Barnes and Noble communicate their strategy to employees and the public?

Would the modes of communication be the same? Explain your answer.