From veteran publishing consultant Mike Shatzkin:
When Barnes & Noble interrupted Holiday week day-dreaming to announce that recently elevated CEO Demos Parneros had been abruptly dismissed for a contract violation that also eliminated his severance, it not only ignited a minor industry of speculation about “what happened?” but it also called attention to the commercial situation at Barnes & Noble.
And that, in a couple of words, is “not good”.
There are two inexorable and unrelenting shifts taking place in the book businiess, and while neither of them are B&N’s fault, it is also true that neither work in B&N’s favor. One is that more and more book purchasing is taking place online and less and less in physical stores. And the other is that more and more books are being published and sold, or distributed, from outside the commercial realm. That is, the entities publishing books to make money on them are seeing their share being sliced away by countless cuts from independent authors and various corporate and cause organizations that want to put books into people’s hands and devices to increase their fame or promote a message, not primarily to make a profit.
Since Barnes & Noble’s great expertise centers around promoting and selling books to consumers in physical stores working with publisher trading partners who are trying to make a profit, that means that their part of the book market is just getting smaller in ways that could only be addressed by selling more online and being a more effective conduit for non-commercial distribution. They’ve failed miserably for two decades at the former and there isn’t big money in the latter.
But commercial book publishing — especially the Big Five with their high-volume flow of commercial new titles and deep backlists but also a diminishing but still long tail of university presses, smaller general trade houses, and specialty publishers — really needs B&N. They’re needed for the hundreds of bookstores they maintain and because they present the one significant alternative to the retailing giant that is growing on the back of the larger trends: Amazon.
. . . .
Just before the Parneros announcement, I had lunch with an industry expert who expressed mild surprise that “the publishers haven’t just bought B&N and fixed it”. This same seer thinks Amazon may be teetering on the edge of vulnerability because they have taken the tactic of steering customers to their own product too far for their own health in the book business.
And on the day that Parneros’s firing was announced, I had met with a publishing veteran from just-smaller-than-Big-5 publishing. He does commercial books, but the ones that don’t usually command six-figure advances. He finds it hard to imagine how publishers will navigate a world without B&N in it and is quite candid about how difficult negotiations with the already-nearly-hegemonic Amazon already are with the B&N counterweight still alive and active.
. . . .
The suggestion that publishers buy and fix B&N surprised me a bit. There was talk about publishers setting up their own online book sales competitor to Amazon 20 years ago and it is evident now why that wouldn’t have worked. Amazon’s significant competitive advantage came from the fact that making money from the book business wasn’t their primary objective: building a customer base on the back of the book business to create a bigger marketplace and ultimately a cloud computing behemoth was where they were going. No publisher or consortium of publishers was going to adopt a vision like that.
But the suggestion does have logical elements. Publishers have the most to gain from a prosperous Barnes & Noble and the most to lose if it goes away. Publishers are, along with store lease-holders, B&N’s most significant trading partners and creditors. And Amazon competes as a publisher, Barnes & Noble still owns a publisher, and major publishers owned the Brentano’s and Doubleday bookstore chains in decades past, so publishers and booksellers have owned each other over the years.
. . . .
Yes, it is a correct analysis that the super-sized bookstore is a dinosaur; massive in-store selection with many titles that hardly ever sell is a relic of the pre-Internet age. And the “curation” that makes a small selection work effectively is more easily delivered by Amazon’s massive supply chain and highly localized market knowledge, not to mention their ability to “promote” by email the existence of a store or anything in it to a large percentage of purchasers in any locale. Similarly, Amazon will find it easy to sell “home goods”, or whatever else is the right thing for any particular location because they probably already do. And while B&N is being urged to ditch the money-demanding Nook ebook line, Amazon would be using Kindle as a springboard to the extent that is relevant at all to a store-shopping audience.
And I’m going to admit to a bit of a chuckle when I read “build a community”. A community? One community? Does that mean one community for people who read Civil War history and romance fiction? No, that’s a silly idea. A bookstore actually needs to foster many communities. You can be pretty confident that Amazon knows that.
Link to the rest at The Shatzkin Files
PG says very smart retailers are worried about competition from Amazon. The idea that some big publishers (which are not very big at all compared to Amazon) know how to sell books at retail better than Amazon does is ludicrous.
Besides, none of the large US publishers are independent entities. They are all owned by large conglomerates in Europe or the US. PG suggests that these conglomerates (which are themselves much smaller than Amazon) have no appetite to fund a bunch of retail bookstores that are very unlikely to be any more profitable than Barnes & Noble has been for several years.
“…neither of them are B&N’s fault…” and “They’ve failed miserably for two decades…” don’t seem to mesh. But hey, that’s Shatzkin.
“Yes, it is a correct analysis that the super-sized bookstore is a dinosaur;”
Well, IMHO, Shatz has that one right (Powell’s hopefully excepted).
This post reminded me of You’ve Got Mail. Today, the plot of Tom Hank’s super-size bookstore driving Meg Ryan’s quirky little bookstore out of business would likely be reversed. My, how quickly times have changed!
Powell’s is stressed but they don’t have 500 added stores weighing them down.
The reason well run non-chain bookstores are holding their own is because they focused on the needs of *their* customers. Powells, among many, sells online. Sells used books. They used to sell ebooks.
Their website actually works.
Most importantly, they haven’t gone out of their way to fritter their brand loyalty.
B&M book sales is going to remain a challenging business but Powell’s has a good shot at hanging on and prospering when B&N folds.
“Powell’s is stressed but they don’t have 500 added stores weighing them down.”
Or Riggio running the show! 🙂
“Most importantly, they haven’t gone out of their way to fritter their brand loyalty.”
I’ve had a Powell’s account for decades. 🙂
“Powell’s has a good shot at hanging on and prospering when B&N folds.”
Yup. They’re doing it right.
Powell’s has about 3x the book density B&N has in the same space.
Powell’s is the b&m version of Amazon because they make an attempt at carrying back list.
Twenty-eight million American adults read poetry this year — the highest percentage of poetry readership in more than 15 years
The handwriting said their expertise in book selling was no longer economically viable. B&M book sales are declining because consumers prefer online sales. Had they avoided all the errors above, they would still fail. Internal favorableshave could not overcome the external unfavorables.
Yup.
The Titanic did not sink because the crew were incapable. A ship designed that way, no matter how well sailed, had no chance against an iceberg.
Mind you, with B & N I sometimes feel as if I’m standing on the iceberg, watching the ship slowly sink into the ocean before it gets here.
If they had avoided the obvious errors, B&n.com wouldn’t be a joke and Amazon wouldn’t be selling over half all print books.
If they hadn’t ruined Nook six ways from sunday they might have hung on to their early 26% market share.
If they hadn’t driven ereader sales to near cost, the interoperable epub ecosystem wouldn’t have effectively vanished in the US and Amazon’s exclusivity plays wouldn’t have as much traction as they do.
Sure, their B&M bookstore business would still be sinking but the *company* wouldn’t be sinking with it if it had viable ebook and online pbook revenue streams to tide them over while they phased out the big box stores aimed at heavy readers and replaced them with much smaller storefronts aimed at casual readers.
The assumption that the decline of the big box storefronts automatically guaranteed the failure of the entire company is as flawed a premise as Shatzkin insistence that Amazon and Indies aren’t in the game to make money.
Both are demonstrably false.
The assumption that the decline of the big box storefronts automatically guaranteed the failure of the entire company is as flawed a premise as Shatzkin insistence that Amazon and Indies aren’t in the game to make money.
The observation is that the introduction of online book sales meant B&N’s expertise was becoming obsolete. They were very good at selling books in stores before online. It’s reasonable to say nobody did it better.
But, they lacked the expertise in online sales, and the network effect worked against a specialty online store.
Authors are interested in B&N surviving. But, the owners of B&N don’t care what authors want. The owners don’t share the objective authors have chosen for them. They want to take as much cash as they can as fast as they can. They are doing a pretty good job.
I’m not sure I would even say that they are “very good” at selling paper books. They built a model that depended on subsidies from the big publishers (selling book placements) and consumers who, from a limited selection, had to choose a book that was “close enough”.
They’ve clung to those two pillars and haven’t budged. Now with their big layoffs, they’ve made it clear that they are going for disposable, part-time help, and don’t think they need the energy or ideas of the people on the ground. Decentralization might be their only hope, imo. Turn B&N into a chain of independent bookstores. But it looks like they are going with the “bust out” model of getting out as much cash as possible before everything explodes.
Look for an eventual bankruptcy filing on the last day of a financial quarter so they can cheat publishers out of as much money as possible before going into receivership.
Decentralization means giving up payola.
Waterstones was doing it to good effect in the UK, letting each store manager decide what to promote. They discovered they were better off without payola, but it took guts to say no to tens of millions of pounds. B&N long ago gave up on saying no to the BPHs.
A second problem for B&N is that they are also dependent on volume discounts. Decentralization means more variety in what the stores promote which will be spreading consumer interest across more titles and result in lower upfront orders for the front list. That would likely result in lower volume discounts, which is the primary disadvantage the independents have vs B&N and Amazon.
Finally, decentralization means giving up top-down control and requires experienced staff competent enough to make good choices. The very people they just fired.
So, while decentralization (combined with serious storefront downsizing) might have saved the B&M side of the company, that ship has sailed.
Just a thought. The only way for the publishers to gain control is buy B&N and then refuse to put their books for sale on Amazon.
They would loose sales, probably too much. But I think a lot of people would go to their site to get the books. Of course this would have to be done at all the big publishers and might be collusion. But maybe they learned their lesson and won’t put the details in an email.
That would be a clear antitrust violation if all the BPHs combine to do it.
If it is just the RandyPenguin it might pass muster but it would hurt them more than it would hurt Amazon.
Today’s reality is that, mostly thanks to Indie, Inc, the BPHs need Amazon more than Amazon needs any of them. Or all 5 combined.
Even Shatzkin gets that much.
He still doesn’t get that Amazon and Indies really are in the game to make a profit, just not the same way as the BPHs. Same game but different rules.
Anyone remember when KDP Select started and Amazon offered it to publishers? They refused, and Amazon opened the doors to independents. They had 50.000 books in Select in two days, and it hasn’t let up since.
Readers wouldn’t have to go anywhere (other than Amazon). Third party sellers would sell them on Amazon. (And probably find pretty good discounted copies, too.) Even if every publisher refused to sell on Amazon, they’d quickly discover their books popping up in listings anyway. Amazon wouldn’t care. Why should they? A sale is a sale.
The qig5 watched/helped the bookstore chains before B&N fall, I don’t see them doing anything but whine as B&N dies in turn.
Oh, and by the way, Mike, if ‘curation’ means a bookstore won’t have the book I’m looking for then your curation is doing you more harm than good.
Both large and small will either adapt or die. Funny how this seems to be serving the small better than the large.
@ Anonymous
“Both large and small will either adapt or die. Funny how this seems to be serving the small better than the large.”
Historically, small entities are much more nimble, flexible, and fast. Because they have to be to survive. This is true in biology; this is true, too, in business. Big organizations are typically ponderous, slow, and may have poor forward vision. Like rhinoceroses. Who, sadly are on the way to extinction. And, not so sadly, so are some businesses.
One wonders why Sears didn’t try to reinvent themselves as the new Amazon. After all, they had a history of selling through the mail.
IIRC, Sears shut down their mail order business just as the Internet was taking off.
Competence or lack thereof is very much B&N’s fault.
They’ve had over twenty years to build a competent online sales channel. They haven’t.
They’ve had over a decade to figure out how to make money selling ebooks and after a good-enough start leveraging their consumers’ brand loyalty, they flubbed every aspect of that business: hardware management, inventory control, and customer relations.
They’ve had a decade-plus to realize the warehouse bookstore business model died in 2008 as anything but a niche for a couple dozen metro areas at best.
They’ve had over seven years to notice that their daily bread and butter–genre book sales–was moving to Indie, Inc and that their slavish devotion to the BPHs is not going to be rewarded. At present they are a distant fourth in Indie publisher appeal behind not just Kindle and Kobo, who are both constantly trying to improve their Indie appeal, but also Apple, which doesn’t even try.
Even when bigger players offered them a useful partnership–Microsoft and Pearson–they failed to deliver on their end and had to buy out what remained of their partners’ investments.
All those things were very much in their control.
Whatever fate brings next, they earned it the old fashioned way: sheer incompetence and unwillingness to read the handwriting on the wall for two decades.
Having consulted for retailers and for a diverse set of large companies for over 15 years, I am quite confident the publishers are not going to be saving Barnes & Noble.
B&N has had negative net income for two of the last four years and negative cash flow for all of the last four years.
There isn’t a believable case for a return on investment in saving B&N that will be high enough to exceed the internal hurdle rates that most corporate owners are going to require to approve the investment.
It’s a lot more likely the publishers’ owners will decide they would rather see their profit margins go up by stripping the publishers down to just managers of the existing IP over which they already have control. Cut the personnel, cut the NYC rental rates, no more seven figure advances to politicians, and just milk what copyrights they’ve licensed already.
“There isn’t a believable case for a return on investment in saving B&N that will be high enough to exceed the internal hurdle rates that most corporate owners are going to require to approve the investment.”
There isn’t even a believable case for stagnation, much less improvement. The customers just aren’t there.
Why buy B&N to close down 500+ of the existing locations?
Better to wait for it to finally fold and cherry pick the best 50 sites (at a discount) and expand from there with a new name and a clean sheet of paper.
Barnes & Noble (BKS) has a 11.43% dividend at Friday July 13, 2018 closing. That’s a payout of $44.84 million on a 392.325 million market cap.
If they stopped the dividend they’d be instantly profitable.
Sorry, but they wouldn’t. They had net income for the year ending April 28, 2018 of negative 125 million. If we removed the 44 million paid in dividends, they still would have had 81 million in losses.
That said, they should have stopped the dividend.
Also, dividends are not an expense that hits their net income. Return of capital to owners is not an expense like payroll to employees. If course it will affect their cash flow statement and cash is king. How much free cash do they have? That’s the key question
Yahoo! reports levered free cash flow at negative 1.37 million.
Oops on my part. I hadn’t realized they’d slid that bad in in the first four months of the year.
If you look around you will see that the debt has been piling up, and there’s nothing coming in to pay it back with.
When the credit dries up, they’re done.
From what I remember, their credit line is down to well under $200M so if they keep paying those kinds of dividends they may not make it to next spring.
If nothing else, the paying of dividends off the credit line suggests the plan is for a Borders-style liquidation rather than a Chapter 11 liquidation.
Riggio may be aiming for a “I leave it as I found it” exit.
If you look around you will see that the debt has been piling up, and there’s nothing coming in to pay it back with.
When the credit dries up, they’re done.
I’m not an expert.. but an 11% dividend from a company bleeding cash,, that just looks to me like the stake holders running off with the money in a bid to leave the creditors holding the bag right before bankruptcy. It’s more suspicious than all the rest of the bad news combined.
I think your suggested scenario for the large publishers is correct, Sean. Cut employment and other costs to the bone and just milk the existing IP assets.
Outsource whatever book promotion makes financial sense to goose sales, but ensure an ROI on each type of promotion for each book.
Use whatever printing technology will most profitably serve declining demand for hard copies and keep inventory at low levels, but mainly take the regular money transfers from Amazon and other etailers for ebook sales as profits.
Offer authors one-time payouts to forgo future royalty payments and increase future profits.
I think your suggested scenario for the large publishers is correct, Sean. Cut employment and other costs to the bone and just milk the existing IP assets./i
The existing IP can be managed like a securities portfolio. This might mean a completely different set of employees. I can easily see firms that never published a book or spoke to an author placing and trading the IP for as much as they can get.
Securities and commodities trading has developed systems that manage far more complex transactions everyday.
A lot of so-called IP trolls are outfits that buy up patents to monetize them, often because the creators of the IP don’t have the legal resources to challenge infringers. So rather than let them go scott-free and end up with nothing, they sell them and collect decent coin either up front, in royalties, or both.
I’d be surprised if we don’t soon see an operation like that targeting owners of “orphan works” and abandonware.
Second order exploitation can be quite profitable if handled correctly.