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.
24 Thoughts on "How Barnes & Noble Can Take a Bite Out of Amazon"
Your strategy requires that B&N to do something that I predict they will find impossible: to view themselves as the underdog.
This is not a bad scheme, except that Amazon already makes all this possible with their e-commerce affiliate tools. Any Amazon affiliate can create their own customized and branded store, getting 6 percent or more commission on purchases. A small publisher using the 70% royalty option from Kindle Direct Publishing can do an additional 6% or more this way. B&N could compete on percentage with a similar program, but it hardly seems disruptive — just another copy.
Joe, I think you’re really on to something. Taking it a step further, why can’t B&N offer to “skin” brick and mortar shops? Imagine a bookstore that was, for all intents and purposes, independent–managing, setting policies, marketing, and selecting books independently, but with the only difference being that books are supplied through B&N’s central warehouses, and they give B&N a percentage at the end of the month? My guess is that the shops would make up for that percentage easily in the additional discounts that B&N’s buying power would get them. The shops could even sell Nook products, which would give B&N a huge leg up in the market, and if the semi-independent store can somehow be recognized as the “home shop” for each device they sell, they could receive a cut of each nook book sold to their customers (smarter people than me would probably have an easy time figuring out how to do that).
Interesting analysis. Makes me curious about what Hachette Book Group, Penguin Group (USA), and Simon & Schuster and are doing with Bookish. http://bit.ly/lwdBz0 & http://blog.bookish.com/ They’ve been working on the yet-to-be -launched service for at least 18 months.
Couple other options that I as a reader would dearly love to see:
1. Subscription service – I just want to read books, I don’t want to own them.
2. Resell option on ebooks.
Give the publisher and author a percentage on every read.
Superb analysis, both of B&N and of #2 strategies.
I don’t think the recommended action would be sufficient to more than slow the juggernaut, which by itself, is insufficient.
What about lending? Suppose B&N breaks the lending embargo for ebooks (which is a joke at Amazon). They institute a “friends and family” lending model and a library-card entitlement model with sequential but unlimited lending (as with print books). Make these moves at the same time that they make the Nook app-agnostic. They corner the library market for sales and everyone buys a Nook because they have the option of the public library. B&N gets the benefit of having an interoperable platform but the first purchase stop remains the Nook store…
I’d love to hear your analysis of a lending scenario that might work as a disruptive action…
The lending option is not controlled by retailers but by publishers, as every ebook that is sold through B&N or anyone else is sold with a license. Changing the terms of those licenses will be difficult because you would have to get thousands of publishers to agree to them. I think that there will be evolving solutions for making ebooks available to libraries, but I am not sure how retailers can play a role in this. On the other hand, if libraries built virtual bookstores directly into their OPACS (thereby creating 120,000 new bookstores), publishers would pay attention and be more accommodating about library ebook licensing.
Great post and also comments. I love B&N and really hope they can survive, but it will take a radical and innovative approach to what constitutes a physical store, what a “book” store sells, and a new take on ebooks.
As a side comment, in minimal and brief interactions with B&N execs, far too much time was taken up with anti-Amazon screeds. There seemed so much bitterness that they couldn’t look to their own future and could only complain about the unfairness of AMZ (totally true, but that’s not really helpful).
Joseph, your core point–that Barnes & Noble needs to stop thinking of itself as a brick & mortar bookseller that also sells eBooks–is absolutely correct. However, some of the tactics you suggest are flawed:
1) The “Friends & Family” model was inherently price competition–it did cannibalize AT&T, but neither company ended up with a viable long-distance business. Amazon is committed to being the price leader, and it would like nothing more than for B&N to engage in a price war (which would be extremely difficult to do so long as agency pricing remains in force.)
2) There are many companies that can provide publishers with “white-label” eCommerce capabilities. Why should publishers pay B&N for its services when there are many alternatives? Is B&N really equipped to compete in the B-to-B market, with its long sales cycles and demands for extensive customer and technical support?
3) B&N could open the Nook Color and Nook Tablet up to competitors tomorrow if it wanted to. I agree with you that it should do so, but its tablets have to be “rooted” in order to allow installation of apps from anyone other than B&N’s own app store. B&N is more concerned about keeping competitors from getting access to its tablets than it is in giving its customers the widest possible choice of apps. That’s a cultural issue that’s hard to get around.
B&N actually used to compete in the B2B market; I know, because I used to work for BN.com’s B2B group, which started life as Fatbrain.com in the late ’90s. The idea was to provide a white-label bookstore to companies as an employee perq. Even though Amazon never really entered this space, in the end it didn’t matter because the extra discount BN.com offered its client companies’ employees — an extra 5% off the consumer site’s prices — generally failed to make BN.com’s B2B prices any lower than Amazon’s regular prices.
I was having an email conversation with someone recently regarding the Nook and Amazon e-readers, and here’s my take on the Nook (and Kindle) after doing some research. While not directly applicable to B&N alone, I think that some of these are valid suggestions for their e-reader, and possibly indicative of the kind of strategy shortcomings that B&N is blind to. What do you think?
Problems…the Nook supposedly lets you get in-store features, like coupons/sales in the cafe (free coffee or sandwich.) BUT they don’t heavily promote that, making me think they don’t take advantage of this. They SO f*** this up by not doing in-store announcements to the Nook or creating some kind of social network-like feature. “Talk” to other people in the cafe. Leave notes like digital graffiti (read messages left behind by other users when you’re in range of a particular location/store). Offer better, random things for promotions. Turn it into an in-store treasure hunt…even Trader Joe’s does a finding-the-doll thing with prizes for kids. Turn the Nook into an impromptu geocaching tool in the store. Or think along the lines of Pizza Hut’s Book-It! program, where reading books gets turned into personal pizza’s for kids.
Turn the Nook into a better in-store guide. I *think* there’s something like it; when I briefly played with one at the counter there was a badge that proclaimed titles “in store” as I searched, so I’m assuming that it was telling me the title was physically available in that particular store location if I wanted it in dead-tree.
Both nook and kindle – let me browse your entire store. B&N is far more limited, since they’re 90% books, but if I want to look for a DVD or (board/card) game, why can’t I get the whole selection to browse? Amazon, this is a drop of the ball. Why can’t I use your kindle to browse your whole inventory? Turn the Kindle into a virtual shopping kiosk.
I’ve always wanted an in-store guide. We went to a B&N in and they had kiosks where you can search for a title (dvd, blu-ray, book) and if it is found it would tell you if it’s in stock, then you can get a map telling you approximately where to look in the store (it was a two-story B&N). Handy feature. Smaller stores might not *need* it, but it could be handy for some people, and maybe extend it to give you the ability to ask questions or summon a help desk person to help you if you wanted.
Nook touch doesn’t have 3G. Not a huge deal but it is a useful feature at times. I had my parents get the 3G model Kindle touch for because I thought it would be handier than trying to wrangle access when we travel, so it’s an option that you pay more for those points where when it does get used, it’s really convenient. We learned in the city recently NOT to take Internet access for granted or as a given in hotels…they can and will sometimes charge you outrageous fees to go online. Even Applebee’s offers free wifi now.
Use the Nook as a payment system. Instead of still needing my B&N card, put my account information on the nook. Not a feature for the security conscious but it can be handy to just barcode-scan your nook at the starbucks to deduct from a standing account. Make it so I can put orders right on the nook and pick them up at the counter. Or have it used to check out at the front desk with your books to cut down on waiting times.
B&N has in-store events; author signings, movie tie-ins (we went to midnight releases of Harry Potter…it was fun…) – TIE THE NOOK TO IT. Send out content. Secret messages for kids. Stuff like that. Show the nook to this person for free cookies or balloon. Etc. The Nook could be a digital coupon.
Prices…I went through books in my Amazon wishlist and randomly chose to look them up to see if there was a kindle edition and price, then look it up in B&N for nook books and price. There were some in kindle that weren’t in B&N, although the difference really wasn’t that horrible. If they had decent in-store bonuses and the interface is noticeably (usably) better, I’d go for the nook. The problem I did see is that there were times the prices were significantly different. Most of them were about the same. But one or two titles had a ~$20 difference. Yikes! Amazon is still cheaper!
What Amazon has going for it is a huge potential selection at low price, and a reputation for customer service. If something is wrong with the Kindle they will take it back supposedly without harassment, and they have a decent selection of titles, with low prices. Browse, download, read. The interface is a little klunky though.
The Nook has an okay selection, several titles (for what I read) tend to be same price as Kindle or more expensive, and if it had a way to complement the in-store experience combined with a better, cleaner UI, I might go for it, especially since you’re supposed to get service from their Nook counter for repairs. The in-store one-hour reading of their books is a very very nice feature to leverage; and I already tend to get a handful of books to evaluate while sitting in the cafe’ and decide what we’re keeping and what’s tossed back in the return pile. The Nook can actually leverage that behavior. It would be nice if it had 3G and GPS, so you could have the Nook tell you where the nearest store is, for example. Have the option of “I love this book/magazine article and want to get it in print…” and tap a button to have the Nook tell you where to get it.
These are all the touch models that I’m comparing. If I wanted a tablet, I’d definitely get an iPad. I want something that holds books and periodicals, not a device that can web browse and email and read books and stream movies and sort of does these things okay but not great (jack of all trades, master of none.) I had some limited experience with Mom’s Kindle (Fire) for Christmas and I wasn’t a fan. We got that because she generally is never far from an outlet and she would probably want the games and movie/video features to play with , and Dad didn’t want to lay out the $400 for an iPad. The Kindle Fire screams compromise and I find the android interface to be cobbled together. I definitely wanted to read things with long battery life and does the reading thing well. If that means getting a book light to read at night, so be it.
I’ll play with a Nook some more at the store. I spent part of last night downloading sample chapters from Amazon and poking around her Kindle touch to see what it’s like. My conclusion is that they have decent prices, but the interface is klunky, far klunkier than it needs to be. But it’s usable and tolerable for the content. Illustrations kind of suck but that’s to be expected from e-ink with that resolution. The 3G part is nice in a pinch…but it’s not like I can turn my hotel room into a bookstore if I didn’t already have stuff packed with me, so I shouldn’t panic that I can’t get a new title to read without going to a wifi spot (thinking here about the Nook touch only having wifi, doesn’t have 3G).
What it boils down to is that for the HARDWARE ITSELF the kindle touch and nook touch are virtually neck and neck. Distinguishing them would mean decent content and experience beginning from the stores and ending at the end user’s shopping experience. They need to stop staring at the iPad and drooling over ways to imitate the iPad and start watching their customers and asking what their device can do that would enhance the customers shopping experience. B&N could make a killing in that regard…people in brick and mortars are paying a premium for convenience. TAKE ADVANTAGE OF IT. Even I’d pay a couple bucks more for a book on the Nook if it meant my Nook was useful in the store and wasn’t as annoying with the Kindle’s advertising (for the price cut) and if the Nook had a more intuitive, cleaner interface.
As insightful as this analysis is at times, it’s stunning how simplistic it proves to be. Here’s why I think your proposals are unrealistic:
1) Amazon strives to be the online Wal-Mart, and so far it’s succeeded (just ask the people who run the *actual* online Wal-Mart). Bezos clearly wants an Amazon customer to be able to shop for most anything on amazon.com, even if s/he’s arrived just to buy the latest James Patterson novel. This has long been the central dilemma B&N has faced in competing with Amazon — one even more central than its inability to match Amazon’s low book prices.
2) Amazon’s one-stop-shopping philosophy is profoundly persuasive, so your idea for B&N to become a white-label storefront for publishers — even if publishers could somehow replace their authors as top-of-mind brands for bookbuyers — means convincing online customers to visit an unending series of book boutiques to do their shopping, and why would they want to do that? Sure, I realize they’d have to set up only one B&N account to shop at Simon & Schuster, Penguin, HarperCollins, and so on. But at each of these stores they’re sure to be dissatisfied to be viewing a single slice of the total book market. And it goes without saying they won’t be able to buy a spare cell phone battery or hedge clippers or flat-panel TV or whatever else they also want while they’re there.
3) Indeed, this is the core reason your AT&T/MCI analogy doesn’t apply to Amazon/B&N. AT&T and MCI were both selling one thing and one thing only: phone service. The commodity books/ebooks that Amazon and B&N both sell may be the same, but Amazon’s dept. store philosophy — and its success in making ordering a lawn mower the same as ordering a novel — are defining differences between the two retailers. (Worse, Amazon uses its Kindle Singles and aggressive author exclusives to distinguish even ebooks from BN.com.) B&N has striven mightily to diversify what it sells both online and in its stores, but matching Amazon’s variety … I think we can both agree how hopelessly expensive and risky such a venture would be.
I have a Nook and one of the things I appreciate about it is that I CAN shop at smaller presses and before Borders went out, Borders (ePub being open/std format has many advantages that I don’t think have been fully exploited). Those same smaller (or online — e.g., Harlequin) have .mobi format now but I don’t know how easy it is to add non Amazon books to the Kindle.
Lots of great insight here. I love Amazon, but a monopoly is good for no one.
(Disclosure: I still prefer my 1st gen Nook to other ereaders inc Kindle; though I was specifically looking at non-Kindles for an ereader, I did test all.