Biggest bookstore turns over new leaf

The giant Barnes & Noble is trying to reposition itself as a key player is the US electronic books market

Barnes & Noble, the world's largest chain of bookshops, posted a quarterly loss of $63m... Sorry? What's that? You no longer want to be called the world's largest chain of bookshops? Let's start again...

Barnes & Noble, the “leading content, commerce and technology company”, posted a 42 per cent increase in quarterly sales from its website, BN.com, yesterday, but yes, that didn’t stop it plunging into the red to the tune of $63m, as sales and profits once again disappointed investors. There’s no spinning it: the transition to the new world of e-readers and digital books is taking its toll on the bricks-and-mortar bookselling giant.

Such is the turmoil that the company is battling an attempt by a rebel investor to unseat members of the board, and it has put itself up for sale, saying the stock market undervalues the company and that its founder (and current chairman) Leonard Riggio is considering taking it private.

Meanwhile, the young chief executive at B&N, William Lynch, is only five months into the job, having been promoted from his role in charge of the website to run the whole shebang, 1,400 stores across the US and all.

The swirling debates over the future of B&N are in fact debates over the whole future of physical bookstores and physical books, a debate that has become more frenetic as e-book sales have soared. Amazon launched its Kindle e-reader in 2007, popularising the idea of digital downloads and snatching perhaps 70 per cent of the ebook market, and B&N has its own device, the Nook, now, too. Meanwhile, Apple’s iPad, and the accompanying iBookstore, provides another means of buying and reading the unprinted word, and Google Editions is launching soon, offering e-books that can be read on devices ranging from the desktop in your home to the smartphone in your pocket.

The market for digital downloads of books this year is forecast at about $500m, and Mr Lynch said yesterday he thought that would turn out to be a “low” estimate. What will become of B&N?

The worry is that the store network will atrophy. In the three months ended 31 July, on which it just reported, like-for-like sales at its stores were down 2 per cent. The strategy for turning that around relies not on books, the company concedes, but on using the space to sell more toys and games, cards and gifts.

Priority One for Mr Lynch is to make B&N a force in online bookselling, and he boasts early success. We have a higher market share in e-books, he said yesterday, than the 17 per cent that B&N claims of physical book sales in the US. It is doing well in the early land grab, unquestionably. The issue is whether it can ultimately dominate online retailing as it has physical sales of books.

“The window of opportunity is finite,” Forrester Research's analyst Sarah Rotman Epps wrote. “Booksellers should learn a lesson from music retailers, which missed the opportunity to differentiate from Apple by leveraging their music retailing expertise as a competitive differentiator. Instead, music retailers gave Apple the space to learn and acquire the expertise for itself.”

Apple is also learning books now, too, and mass-market retailers, such as Wal-Mart and Kmart, also appear to be getting digital religion. The forthcoming Google Editions, based on the search engine’s decade-long project to digitise all the world’s books, could act not just as a retailer direct to consumers but also as a wholesaler to independent bookstores and others who want to get into online retailing of e-books.

It is going to be a varied ecosystem, and quite different from the way books are sold on the high street. And publishers, running a divide and rule strategy, love it. They have switched the industry business model right round for the digital era. Instead of wholesaling books at a discount to retailers, publishers are setting the price, and offering only a fixed percentage commission to the retailer.

Publishers are being savvy in another sense, too, says Dan Cryan, head of broadband research at Screen Digest, although his praise contains a warning that there are potential storm clouds on the horizon for publishers and B&N alike.

“Unlike the music industry in the early days of digital, publishers have realised that if they are going to prevent piracy then they must make content available widely, fast and easily – and they are having some success in getting people into the habit of using legitimate sources,” he said. “But how well that will work after e-readers become very widely used remains to be seen.”

B&N shares were down 3 per cent in early trading yesterday. The company tried to pin most of the blame for the missed forecasts and reduced full-year guidance on Ron Burkle, the supermarket billionaire who is demanding seats on the board in a protest over what he says is the cosy and complacent rule of the Riggios. B&N last year paid $514m to buy a college bookstore chain owned by Mr Riggio when, Mr Burkle said, it should have been focusing on its digital strategy instead of doubling down in bricks and mortar.

The speed with which the company scales back the size of its bookstore chain, or fills it with gifts and games, will be up for perennial and furious debate whoever wins the proxy battle.

Because, of course, these are early days for e-books. Who can say yet what we will be reading books on in ten years time.

“Paper!” says Dan Cryan. “Undoubtedly, there will also be a big market for digital books, but the crazy growth we are seeing in percentage terms starts from a very small base. The pace of change is easy to overestimate. It is ten years since Napster revolutionised music, but there is still a CD market, let’s remember. It is my judgment that in ten years there will still be a significant market in dead trees.”