Changing economics of the book business
If anyone ever wonders why legacy businesses often have difficulties competing against new ones, the current changes in the book industry should prove helpful. Jeffrey Trachtenberg's article in The Wall Street Journal from a few months ago, "E-Books Rewrite Bookselling," says this about the changing landscape:
This is a point that I made in a prior article about Barnes & Noble but it's worth reiterating. Bricks & mortar bookstores have used the $12.50 they used to earn, to pay for the physical bookstores, employees, etc. With a collapse down to $3.90, the fate of companies like Barnes & Noble, Borders, Chapters Indigo (Canada) and so forth depends on if they can develop a business that survives on $3.90 versus the former $12.50 and/or they can reduce costs.
On top of all this, it's not clear to me if e-books are a winner-takes-all business—many Internet service industries are! If there is only room for one, it'll be a tough battle for someone like Barnes & Noble or Chapters to dislodge Amazon.
E-books have turned the economics of book retailing upside down.
When it launched the iPad last month, Apple championed a new approach to e-book pricing. Earlier this year, most large publishers agreed to establish a so-called agency model, where the publisher receives 70% of the digital price while e-book sellers act as agents and receive 30%. While some best sellers remain at $9.99, many major authors are priced at $12.99 or $14.99.
For many digital booksellers, the new model is good news: Instead of having to pay publishers half, or $12.50, for the e-book edition of a $25 hardcover book, and then sell that book at a loss—for, say $9.99—to match Amazon's cutthroat prices, the bookseller now gets 30% of the newly-set $12.99 price, or $3.90. Since it hasn't paid anything for the title, it is ahead of the game.
But for Barnes & Noble, the model can't hide a brutal reality: $3.90 is a fraction of the $12.50 it now earns on a full-priced hardcover priced at $25. If e-book sales become a quarter to a third of the market, store revenue would plunge.
This is a point that I made in a prior article about Barnes & Noble but it's worth reiterating. Bricks & mortar bookstores have used the $12.50 they used to earn, to pay for the physical bookstores, employees, etc. With a collapse down to $3.90, the fate of companies like Barnes & Noble, Borders, Chapters Indigo (Canada) and so forth depends on if they can develop a business that survives on $3.90 versus the former $12.50 and/or they can reduce costs.
On top of all this, it's not clear to me if e-books are a winner-takes-all business—many Internet service industries are! If there is only room for one, it'll be a tough battle for someone like Barnes & Noble or Chapters to dislodge Amazon.
The dominance of a Microsoft or Apple's iTunes is the exception not the rule so there is definitely space for maore than one. The real question is can B&N use its retail space to sell stuff other than books? As a former bookseller my experience is that books make up about 80% of the turnover of a typical store. I suspect it will be 50% or less in only 2 years. For a superstore to survive it will have to sell a lot of other goods.
ReplyDeleteDigital - both hardware and software packages - would be my guess. In addition to selling their own Nook brand (and accessories) they will move to sell other electronics, especially tablets. In return their ereader software will be preloaded. Also more educational games and toys, bigger cafes and so forth.
At the same time you migrate your declining books instore to your website, as ebooks or otherwise.
The transition period will be very tricky so from an investor point of view it could be... interesting. :)
In Canada, the leading bookstore, Chapters Indigo, has attempted what you have suggested, by expanding store goods to include toys and the like. Success appears mixed although it's too early to say for sure.
ReplyDeleteThe bookstores will probably try the strategy you have outlined. The problem, of course, is that they will be entering a new business and it's doubtful they have the advantage. For instance, what's the advantage a bookstore will have in selling electronics vs an electronics store like Best Buy? Stores like Best Buy are starting to sell e-readers like the Kindle and it's not clear what a legacy bookstore like B&N offers above a Best Buy experience. Maybe more helpful, dedicated, staff?
I think, as you allude to, the best hope is to expand the online marketshare. Someone like B&N can probably also compete on the cafe experience but I believe they don't really make much money off that right now (not sure how profitable the cafes are).
Value investors can make money off declining industries so it'll be interesting to see how this plays out. If B&N stays cash-flow positive, while sales decline slowly, it can be a profitable opportunity. Their R&D on the Nook is throwing off the numbers but as long as the core business slows down slowly, it can survive. This is especially true if Borders liquidates--no sign of that so far--and B&N ends up being the only major, physical, bookstore remaining.