Barnes & Noble’s strategy is to do everything that Amazon does, but to do it later. It’s rare in corporate America that a management fights so hard to be #2. This is not the same thing as the Avis car rental company’s media strategy of old: “We’re #2, so we have to try harder.” At the time of the Avis campaign, Avis was in fact tied for #2 with National Car Rental, behind #1 Hertz. Avis’s target was National, not Hertz. It was a winner. But the B&N strategy is of a different kind, a deliberate effort to be second best.
I happen to believe that B&N’s position is better than many pundits would have it. Comparing B&N to Borders is a mistake; Borders was a shipwreck even in a strong economy. B&N has displayed great skill in managing its bricks-and-mortar stores and has surprised everyone by coming from behind and grabbing 25% of the e-book market. B&N has also attracted investment from Liberty Media, which could help in getting the kind of media properties it feels it needs for the Nook tablet, though that in itself may not help it with its book business.
Which is to say that B&N is trying very hard to close the gap with Amazon. The problem with this strategy is that it requires Amazon to blunder. But Amazon is not sitting still. Virtually every week brings news of another Amazon initiative, whether it’s a new device or the opening of business in a new country. And Amazon is doing this on top of a business that is already 10 times the size of B&N. It’s hard to compete at this scale. I wish B&N all the luck in the world, but a different strategy would help more than luck.
Part of the reason B&N is intent on playing catch-up is that they continue to view the world of online retailing as though it were driven by the same forces as bricks-and-mortar retail. This is what I call, “The Format Fallacy” — the belief that what matters is whether something is print or digital and ignoring the broader structural changes that format changes bring about. Print is not just a format; it is an ecosystem. As the world of books moves online in digital form, a new ecosystem is arising. Amazon knows this. Heck, they invented much of it. For B&N, a compelling strategy would be to study this new ecosystem, which Amazon dominates, and to seek ways to disrupt it.
So let’s take the time machine back to the age of long-distance telephone companies and the battle between AT&T (the original AT&T, not the current one, which bought the old trademark) and MCI. Here was AT&T, the market leader (think “Amazon” as you read “AT&T”), totally dominant in its market. MCI was the upstart. Both companies had an interest in getting as much as they could from every customer, from each and every phone call. But then MCI came up with a marketing plan called Friends and Family. This plan allowed a customer to create a circle of people with whom you could get discounted phone service. This was a radical and cunning idea. MCI was cannibalizing its own business by offering its own customers lower prices. Why would they do that?
The reason they did it was that they were #2 and had developed a strategy that exploited that market position. As millions of people signed up for Friends and Family with MCI, MCI lost some margin on customers that they already had. But since AT&T had by far the most customers, most of MCI’s new customers came from AT&T. So the cannibalization of MCI’s own user base was more than offset by the huge strides in increasing market share at AT&T’s expense.
It should be noted that this program left AT&T with no effective response. They couldn’t match MCI on price because any price cut would be handed out mostly to AT&T’s own customers. AT&T did attempt one laughable response, the development of a new low-end brand called Lucky Dog (I kid you not), which aimed to enter the price-sensitive segment of the consumer market. This round went to MCI. It took mobile telephony and the Internet to change the playing field again. Ultimately, AT&T had to sell itself to a former subsidiary.
Dominant players in any mature market (say, STM journals publishing, to take a random example) should think hard about what happens when the former MCI marketing head takes a job with a scholarly-publishing start-up. (Oops! He already took a job at PLoS ONE!) They should also think of the consumer book business as the canary in the coal mine for all publishing segments.
The problem for B&N is that the numbers going forward don’t look good. B&N has around 25% of the US trade book market; no one knows exactly what Amazon’s US market share is, but Amazon is almost certainly a third or more smaller than B&N in the domestic market. (Amazon is bigger in books on a global basis and bigger everywhere when other merchandise categories are taken into account.) But with e-books now comprising as much as 20% of the US book market and Amazon controlling about 60% of that 20%, you have to wonder how things look when e-books are 50% of the market, which may be only a few years away. It’s understandable why B&N is determined to close the e-book gap with Amazon, but to add over 15 points of market share (bringing both Amazon and B&N to around 40% each), would cost far more than B&N can spend. B&N needs an MCI solution.
I don’t believe that B&N has fully tuned into the economics of working in a network environment. For all the talk of the democratization of the Internet and the Long Tail, network economies tend to be winner-takes-all. Amazon is fast approaching a position where it becomes a virtual monopoly like other tech giants before it — Microsoft with Windows and Office, Facebook with social networking, Google for Web search, and Apple (through iTunes) for music consumption. All of these monopolies reach a plateau at some point, where other products and services begin to restructure the paradigm (e.g., the role of Cloud computing and mobile telephony in eroding Windows’ base), but while the party lasts, it is one heck of a profitable ride. It is far more urgent for B&N to prevent Amazon from reaching that point than it is for B&N to strive to achieve that point itself. B&N should be hell-bent on destroying the e-book paradigm, not on trying to control it.
Windows is not declining because people prefer Macs or because programs written in Java can run on any operating system or because Linux is technically superior and inexpensive; Windows is declining because the paradigm has moved off the desktop to the Cloud and mobile devices. B&N can challenge Amazon not by being a better e-retailer but by undermining the very idea of third-party retail. The key for B&N is to enable (and profit from) the creation of more and more places where people can buy books, all of them chipping away at Amazon’s lead.
The first area to develop is publishers as direct-marketers of their own e-books. Of course, it’s challenging for book publishers to sell books directly to end-users. Few publishers have brands that attract users (in trade books, authors are the brands), and the technical infrastructure of online bookselling is not trivial. The good news is that Google will help with the first item and B&N can help with the second. Google’s Web search atomizes Web sites; it brings users deep within a site to the very piece of information the user needs. This means that a site that has rich metadata about its books can cajole Google to send traffic its way. A well-designed site plus a good search engine makes D2C commerce possible. Amazon won’t throw in the towel as more publishers begin to sell direct, but direct selling will hamper Amazon’s continued growth.
B&N can help these publishers by “skinning” its own site — that is, bn.com — with the brands and titles of individual publishers. B&N thus becomes a service provider, making its infrastructure available to third parties. GenericHouse Publishing creates a Web site and store on the B&N platform, fulfills books from the B&N distribution center, and uploads e-books for privately branded versions of the Nook family of e-reading devices. B&N also brings online know-how to GenericHouse, which learns how to analyze user logs, build better metadata (the key to online merchandising), and offer special packages — packages, by the way, that are not available from any other source (e.g., an ad hoc collection of books by a major writer, offered as ebooks on a subscription basis). GenericHouse will never outsell Amazon, but from B&N’s point of view, it doesn’t have to, as GenericHouse is one of thousands of publishers now doing business on B&N platforms, for which B&N extracts a cumulatively meaningful fee.
B&N need not stop there. The Nook family can be configured to allow any seller of books, including Amazon, to make an app available on it. This would make Nook e-readers into universal devices and bring more buyers to it. I just went through the exercise of looking for a new e-reader myself, as the backlit screens of my smartphone and iPad tire my eyes. But no e-reader allows you to purchase and read books from any source. In the absence of such a device, users flock to the market leader, which is Amazon. I thus recently became the owner of a Kindle Touch.
Since the strategy is to create more and more places for people to buy books, B&N’s historical rivals, the independent bookstores, now become prospective allies. Franchise and boutique programs could be put in place, enabling even small, local entrepreneurs access to the B&N infrastructure, from overnight print shipments to private-label online bookstores. Indeed, independent booksellers already are becoming publishers, usually of local material, but their path forward could be made much more efficient if B&N provided all the back-office services for this. Each franchisee delivers pennies to B&N, which add up in the aggregate. But the more important thing is the continuing downward pressure on Amazon’s market share.
B&N is no longer the big dog of U.S. publishing, but it continues to behave as though it were. For B&N, the strategy must be to put the network to work for it, making B&N into the new nexus. This is not a game of control, but of friends and family. And on the Internet, anyone can be your friend.