MediaFile

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.

Why does Amazon please Wall Street so much? The company treats shareholders with a disregard that borders on contempt. (CEO Jeff Bezos is "willing to be misunderstood" which means he really doesn't care if investors understand the business, as we'll see.) Yet when it announced that profits last quarter fell 45% year-over-year, the stock price saw a healthy bump. Meanwhile, many tech companies, like Apple, which had a high-profit, high-margin quarter, found their stocks punished. Perhaps this is a sign that Wall Street is finally embracing the idea that, for tech companies, growth comes first, even at the expense of profit.

If that’s what’s going on then the Street has started to adopt the ethos of the Valley, specifically of one its most prominent sages: Harvard Business School professor Clay Christensen. The godfather of disruptive innovation, Christensen is often quoted chapter and verse by technology company founders and venture capitalists alike. Christensen studies how established, high-flying technology companies like Amazon and Apple conduct business, to determine if they are ripe for attack from low-margin, startup competitors. His thinking can help shed light on why the market loves Amazon, which is, after all, a barely profitable conglomerate of loosely related businesses that is growing at a bonkers rate. But basically, his theories all comes down to profit margins, and how companies spend their money.

Amazon’s razor-thin margins -- just 1.9% for all of 2012 -- are, according to Christensen’s theories (and some other Amazon watchers), the company’s key weapon defense against disruptive competition. Not just in defending itself from whatever competitors exist today, but also from competitors that might exist tomorrow. Christensen writes in his seminal book, The Innovator’s Dilemma, that disruptive companies generally start at the low-end of the market, serving customers with cheap, low-margin products that established companies have neglected, in their endless quest to move upmarket, increase profit margins, and please investors.

Sometimes the most important ideas in tech are hiding in plain sight. In that spirit, here are three predictions for 2013 that are just waiting to happen. No 3D TVs, wearable computer or jet packs for me — at least not this year.

The Kindle Offer You Can’t Refuse

Demand is rapidly shrinking for e-ink e-book readers. IHS iSuppli predicts that when the books close on 2012 some 15 million will have been sold — down 36 percent from 2011.

And why not? Tablets are getting cheaper. Sure, you can pick up an ad-supported Kindle for as little as $70. But why shell out even that when $200 gets you an e-reader, and a media player, and a gaming machine, and everything else?

This week Apple faces two significant tablet challengers. The first is Microsoft, which is releasing its long-awaited Surface tablet on Friday. The second is… itself.

Yesterday, amidst the anticipation for the Surface and strong sales for the Kindle Fire, Apple announced a slew of new devices, the $329 iPad Mini the most intriguing among them.

The mobile era has been defined by Apple: iPod, iPhone, iPad, you know the drill. Apple ascended largely unchallenged, facing only a few stunned and weak rivals. By the time it got to tablets in 2010, Apple benefited from an unspeakably large pent-up demand for a device nobody had been clamoring for. Since then it’s sold more than 100 million iPads.

How do you know if you’re in a buyer’s market, or a seller’s?

Offline it’s pretty easy to know. There’s price pressure, abundance and not too many people vying for the same house, commodity or mint condition Pee-Wee Herman doll at the yard sale. In the land of the real, markets aren’t terribly efficient. Before the Internet changed everything, retailers were bound by geography and the ability (and willingness) of people to range. That’s why gas costs a lot more right off the highway exit than it does less than a mile down, where strangers would rather not venture. (Now, of course, there’s an app for that.)

Online, it’s easier to know where the consumer stands. In fact, online, it’s always a buyer’s market. There are, of course, always fixed costs that help determine an item’s price – a book publisher’s monopoly or the cost of jet fuel, say. But a buyer’s power to compare prices from a comfy chair has made it difficult for online sellers to gouge – to insist on a higher price than the market bears – because the market is transparent, fluid and infinite in all directions. Services like Kayak create an almost perfect buyer’s market for air travel, which was already one of the world’s most competitive businesses. Amazon’s ability to offer nearly everything at buyer’s market prices has created a retailing behemoth that doesn’t even need an Apple-like seller’s market to thrive.

And then there’s eBay, an Amazon contemporary with an identity that’s been in crisis for years.

Editor’s note: This piece originally ran on PandoDaily.com. It is being reprinted with permission.

Whether you own one or not, you have to respect the Kindle. In the age of digital Darwinism – where perfectly good products and companies were brutally rendered extinct by superior species – the Kindle was the little e-reader that could, not only thriving in the age of tablets but even, in time, evolving into a multimedia device that took a bite of the market share for tablets.

The Kindle was never flashy. It lacked the sexiness of the iPad, offering instead pure functionality. Its design was bland and boxy, offering up a color spectrum that could be found in a dirty ashtray. It went on sale in 2007 for $399 and sold out in five hours. Skeptics thought this was just a small but fervent niche market of book lovers who fetishized the Kindle. But in time, the Kindle proved those skeptics wrong.

Thousands of people will be “the first” to get the new iPhone 5 today. I won’t be among them. I’ve had every model of Apple’s revolutionary handset since it was first unveiled five years ago — upgrading even if my phone contract hadn’t expired yet — and, like the first-time parent of a toddler in a public place, am in a state of panic the moment I don’t know where my iPhone 4S is.

But I am skipping this upgrade. And while Apple is already setting sales records (again) with this launch, I’m seeing this milestone as the beginning of the end of the smartphone as the dominant mobile device in our daily lives.

Don’t get me wrong. I’m not abandoning the iPhone, or any smartphone — at least not yet. I’m not even saying my iPhone 4S will be my last Apple handset, or that the smartphone won’t endure, even if only as a commoditized device.

Amazon is going where few have dared to tread, announcing a “full size” tablet that takes on Apple directly — and has the gall to be cheaper than the iPad. The tablet highway is littered with the remains of wannabe iPad killers from big hardware names — Motorola, Blackberry, Samsung. Even Google, whose Android software powers the Amazon tablets, didn’t bother to poke the Cupertino giant when it released its Nexus 7, choosing to make a tablet a smidge under two inches smaller than the iPad.

Amazon’s new large tablet, the 8.9-inch Fire HD, has a slightly smaller screen than the iPad’s 9.7 inches. But the entry-level price, announced today, is $300 — $200 less than the iPad equivalent, and only $100 more than the industry standard price for the new 7-inch interlopers, pioneered by Amazon.

Why bother overtly taking on Apple? Because Amazon can — and almost only Amazon can.

The Department of Justice, as anticipated, filed suit Wednesday against Apple and five of the Big Six publishers over alleged price-fixing. Three of those publishers have entered into a proposed settlement with the DOJ, but Apple is still on the hook.

We won’t know until we know whether Apple will win, lose or settle (and now there are 16 states piling on the charges, too), but in a way it’s a sort of hapless victim. If the DOJ theory is correct, Apple did participate in a sort of conspiracy, but one driven (again, according to the allegations) by publishers that were determined to keep controlling e-book prices. In the beginning of the e-book industry it was the publishers, not Apple, that had the upper hand.

It’s important to remember the climate in which this alleged conspiracy unfolded. Amazon, against publishers’ wishes, was going rogue with $10 e-books. The mammoth online retailer – which got its start in print books but essentially created the e-book business – was widely thought to be making nothing, or next to zero, on its proprietarily encoded e-books, the better to boost demand for the Kindle.

The scene: A federal courtroom in Tyler, Texas.

The drama: A lawsuit by a patent troll who said he owned the rights to the “interactive web.” The troll says he’s owed some back rent for owning the Web we all use every day.

Dramatis persona: Tim Berners-Lee. Perhaps you’ve heard of him. He invented the World Wide Web.

Oh, to have been in Tyler. It was the stage for a showdown in one of the most bizarre patent troll cases ever, pitting (metaphorically if not in fact) expert witness Berners-Lee against some punk who wanted to make his name by taking out a very, very big gun in a shootout. The plaintiff, Eolas, claimed it owned patents that entitled it to royalties from anyone whose website used “interactive” features, like pictures that the visitor can manipulate, or streaming video. The claim, by Eolas’s owner, Chicago biologist Michael Doyle, was that his was the first computer program enabling an “interactive web.”