By Nook or by crook

February 27, 2013

Barnes & Noble, the venerable book merchant whose history spans three centuries, is in the midst of a strategic identity crisis: how to admit defeat on its Nook platform while turning its last-bookstore-standing status into a de facto monopoly. Barnes & Noble did not spark the e-book revolution – now accounting for 22 percent of all book sales – nor has it proven particularly good at evolving it. So now it’s back to basics, which is to say, back to books.

The precise fiscal health of the company’s Nook Division ‑ e-readers and e-books ‑ is not public knowledge. But the company’s most recent results revealed that its total losses had increased from the previous year. This, as you might surmise, is not the desired trajectory for a business unit that Microsoft asserted was worth $1.7 billion a mere 10 months ago (when Microsoft invested $300 million for a 17.6 percent stake). Only three months ago, Pearson reaffirmed that estimate when it took a 5 percent stake for $89.5 million.

Now the New York Times reports that a person familiar with the company’s strategy says disappointing holiday sales in particular “caused executives to realize the company must move away from its program to engineer and build its own devices and focus more on licensing its content to other device makers.”

In other words, not quite four years after it released its first Nook e-reader, B&N is prepared to close the books on hardware.

To wit: The company’s chairman, Leonard S. Riggio, is bidding to buy all 689 Barnes & Noble bookstores, effectively separating the fate of old media from that of the e-book division, which was predicated on the ill-fated strategy of pushing e-reading devices as well as reading material.

Now, the assumption is that Barnes & Noble will just peddle books – tactile, digital and otherwise. That’ll mean exiting its Nook business. B&N’s decision to eschew hardware takes a page right out the playbook of a hardware giant ‑ Dell. Both were early movers (albeit decades apart) in promising new businesses. Barnes & Noble’s 19th century printing heritage launched a bookstore empire with the opening of its first retail store in 1917. For his part, Michael Dell starting assembling personal computers in his college dorm room in 1984 and built that modest enterprise into a Fortune 50 company.

Dell is aiming to go private, the better to focus on managing its core business rather than tending to the business of managing shareholders. It has not been able to crack the mobile device club dominated by Apple and Samsung (and where Amazon, Barnes & Noble’s nemesis, is a scrappy third in the tablet sweepstakes.)

For Dell, that means making the most of a shrinking market. But there is plenty of that market left, even if there isn’t room for many players. PCs may not be a growth industry, but they aren’t going anywhere; sales dipped in 2012 for only the first time since the dot-com bust. But the handwriting is on the wall: It is a computing niche in decline. So why not put your mind to owning as much of that business as is humanly possible?

Barnes & Noble faces a similar challenge: Books aren’t going anywhere, though e-books are projected to steadily increase their market share, reaching the 50 percent milestone perhaps as early as 2016, according to PriceWaterhouse Coopers. It’s an opportunity for a company that is a full-service book merchant, and a reason to keep stores open.

There is no shame in a strategic retreat. Neither company was wrong to try to adapt and expand into logical new businesses. And it’s usually true, as I’ve noted, that the lesson of tech history is that smart companies crash when they believe what they have already done is all they need to do.

Sometimes, though, doing something new doesn’t turn out to be the right thing. That’s when it makes sense to consolidate and conquer.

Just as Dell is beautifully positioned to capitalize on a shrinking PC market by being one of the last of a dying breed, Barnes & Noble has a similar opportunity. The company developed some first-rate e-readers, but the world has spoken. It has content, and companies like Samsung and Microsoft have deep pockets and hardware cred and need what B&N has.

There is still gold in them thar digital hills for Barnes & Noble. Bookstores are not going away (though B&N does plan on closing about 15 unprofitable locations a year and will pick new targets more slowly). So why not play to your strength in the growth industry ‑ content ‑ and own as much of that shrinking printed books market as possible?

Dell may provide a template for Barnes & Noble’s regrouping, but the company it least wants to be is Borders, which was forced to liquidate two years ago when its own store-heavy, digital-light strategy ran out of runway.

The demise of Borders left Barnes & Noble as the only national bookstore chain in the United States. As sad as that may be, it is an advantage B&N can and must press.

PHOTO: Portraits of Edgar Allan Poe and Walt Whitman are shown on the home screens of Nook readers from Barnes & Noble, which use technology developed by E Ink Corporation, in Cambridge, Massachusetts October 25, 2012. REUTERS/Dominick Reuter

One comment

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As a book lover (both in hard copy and software form), I wholeheartedly agree with your comments regarding Barnes & Noble. We reside in a university city in North America and the last B&N store closed a year ago. The walk-thru book stores of the past where one could browse before purchasing are sorely missed by us. Purchasing online is efficient if you know what you are looking for but the process is not as enjoyable.

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