In an anticipated response to Amazon’s latest Kindle Fire releases, Barnes & Noble (BKS) announced two new models in their Nook line – the 7” Nook HD and the 9” Nook HD+.
The new devices, which will be available in October, are built on top of the Android Ice Cream Sandwich operating system, but with a B&N wrapper. Price-wise, the new Nooks are competitive with their Kindle Fire peers, as well as the Google Nexus. The 8 GB Nook HD costs $199; the 16 GB model $229. The HD+ starts at $269 for a 16 GB model with a 32 GB model available for $299.
Initial product reviews from Engadget, CNET, The Verge and others all point to a product with strong technical specs and great design aesthetics. The 7” HD is clearly aimed at readers, while the larger HD+ with its 1920x1200 screen resolution aims to match the Kindle Fire HD as an entertainment device.
Yet product specs are largely irrelevant to whether Barnes & Noble may have a successful future. The long-term viability of Barnes & Noble will not be determined by product features, but really by addressing two key questions:
- How, if at all, can the brick & mortar stores be an asset, rather than a financial drain?
- What markets can B&N own?
The first generation Kindle was first released in late 2007 at a price of $399. While sales exceeded initial expectations, the first generation Kindle remained a niche product. Amazon released the 2nd generation Kindle in 2009 at a $299 price.
In October, 2009, Barnes & Noble responded with the Nook at $269; Amazon responded by immediately cutting the price of the Kindle 2 to $259.
When the Nook was first released, Barnes & Noble’s brick-and-mortar stores were an asset. Kindles were still somewhat of a curiosity and the typical consumer had probably never held one in their hand. Meanwhile, the iPad had yet to come to market, and these early tablets were simply viewed as e-Readers.
Having a 1,000 square foot display at the front of each B&N store was a key way of getting consumers to see and touch these devices for the first time. At a price point above $200, these devices were not yet impulse buys, so giving a buyer the ability to try it out in a store gave Barnes & Noble an initial edge.
Since that time, tablets have emerged and readers have become ubiquitous. Almost every student in my daughter’s 8th grade class has at least one of the iPad, Kindle or Nook. According to PwC, by Q1 of 2012, 30% of adults in the US had at least one portable reading device. Price points have dropped below $100, making it an impulse purchase. It’s so easy and inexpensive to buy a Kindle from Amazon that you don’t need to touch it first. Today, roughly 6 in 10 eBooks are sold through Amazon, with Barnes & Noble accounting for 25% and Apple 10%. The new Google Nexus and rumored 7” iPad Mini will create further disruption in the market. And those products will be available at Wal-Mart, Target and Best Buy, where Nooks will not.
Fast-forward five years and any benefits of big box brick-and-mortar stores will vanish. eBooks already have double-digit market share in the US, with PwC forecasting that to reach 50% by 2016. The average Barnes & Noble store is 26,000 square feet. As more and more content is consumed via devices, the revenue per square foot of these stores will continue to slide and Barnes & Noble will be forced to shutter many more stores.
What were once an asset will simply become an anchor on the company’s bottom line.
Which leads me to the second question: Which, if any, markets could Barnes & Noble own?
Under the above scenario, Barnes & Noble can expect to see their e-reader market share drop from the current 25%. At the same time, in-store sales, which currently account for 60% of the company’s revenue, will, no doubt, shrink to a fraction of that as more content is purchased in digital form. The reduced foot traffic to stores will have an even bigger impact on profit margin, driven in part by the sale of cards, trinkets and other impulse buys near checkout.
So, the outlook for Barnes & Noble successfully competing with Amazon, Apple and Google as a general purpose e-bookseller seems pretty dim.
Yet I do see an opportunity for Barnes & Noble to succeed, by focusing on select niche markets where it can dominate.
The two most obvious markets in my opinion are children’s books and the education market.
Children’s books remain one of the more profitable segments in the book industry. According to the Association of American Publishers (AAP), children & young adult book sale growth exceeded 61% last year. Barnes & Noble has long been a leader in the sale of picture books and early reader titles. And while e-readers have transformed the overall book market, I believe there is a lot more that could be done to bring the children’s book market to digital. The solution there is more than just a cool device, but rather a close partnership with publishers to develop multimedia content optimized for the digital platform. Neither Amazon nor Google have shown the ability to work well with niche markets. For them, it’s all about scale. Yet Barnes & Noble has longstanding relationships with publishers whom it could partner with to transform the digital reader market for children.
The education market is also ripe for transformation and few companies are as well-positioned as Barnes & Noble to do so. This past spring, B&N partnered with Microsoft to create a jointly-owned Nook subsidiary aimed largely at the education market via the Nook Study etextbook platform. I think Barnes & Noble should double-down on the education space. When B&N put itself up for sale, I suggested Blackboard, Inc. as a potential suitor. I still think that deal would make a lot of sense, but even if that never comes to fruition, Barnes & Noble needs to root itself deeply into the textbook market. That market is up for grabs and it seems that Apple or Barnes & Noble will become the likely winner. Barnes & Noble should move quickly to secure the needed partnerships and focus its efforts on winning there.
There’s no clear path to profitability for Barnes & Noble through brick-and-mortar stores or as a general bookseller. it simply does not have the size, scale or online traffic to compete with Amazon in the long run. The quicker it focuses on the niche markets it could win and jettisons costly businesses where it cannot, the more likely they can write a successful next chapter in their history.