Wednesday, July 20, 2011

Barnes & Nobles Focuses on E-Books

Barnes & Noble Focuses on E-Books

Firing Bookworms, Hiring Tech Jocks, Barnes & Noble Strives to Survive

Wall Street Journal

As reading moves ever faster from hardcovers and paperbacks to electronic gadgets, the retailer is attempting to reinvent itself as a seller of book downloads, reading devices and apps.

The shift was never clearer than last January, when a small group of experienced book buyers at the company was called in and dismissed. Barnes & Noble's buyers were once book-selling royalty, minititans whose taste played a pivotal role in deciding which books danced up the charts.

For the bookseller there was little choice. It needed to invest in the future. Today, customers at snap up three digital books for every one physical book. When it reported results for its fiscal year ended April 30, the company noted that sales of digital products boosted same-store sales 0.7% for the year, more than compensating for the decline in consumer book sales.

Barnes & Noble's digital strategy represents a costly investment, but it's one that appeals to Liberty Media Corp., which is offering $1 billion to buy the company even as rival Borders Group Inc. is passing into the hands of liquidators. Earlier this month, John Malone, Liberty Media's chairman, and Leonard Riggio, chairman of Barnes & Noble, each expressed interest in working together. Liberty Media is now reviewing the retailer's books. A spokeswoman for Barnes & Noble declined to comment on the sales process.

Today's Barnes & Noble depends on its bookstores to introduce customers to its Nook e-readers, but its growth and future profits hinge on outfoxing and outselling deep-pocketed rivals Inc., Apple Inc. and Google Inc. on the digital-books front. Amazon, for example, last month disclosed that mystery writer Michael Connelly is the seventh writer to sell more than one million Kindle books.

."It's a balancing act, because bookstores are needed to generate excitement even though the final transaction may be digital," says Lorraine Shanley, a partner at industry-consultants Market Partners International Inc. "All the big-box retailers, including Wal-Mart, are facing the same issues."

It's also a divide that reaches to the very top of Barnes & Noble.

The traditional company, based at 122 Fifth Ave. near New York's Union Square, still focuses on its 705 consumer bookstores, which stock up to 200,000 titles, and its 636 college bookstores. Leonard Riggio, its chairman and largest investor, as well as Mitchell Klipper, the chief executive of the chain's retail group, and Joseph Lombardi, the chief financial officer, have their offices there.

But William Lynch, the 40-year-old Silicon Valley veteran who was named CEO in March 2010, works out of 76 Ninth Ave. in Chelsea, where Barnes& is based. Google's New York offices are in the same building, which is across the street from an Apple store. A recent elevator ride filled with people wearing jeans and T-shirts indicated which building had the hipper vibe.

In a discussion with Wall Street in late June, Mr. Lynch outlined an upbeat digital future. "Yes, we're making big investments," he said. "The good news is given our top-line growth, which is faster than we projected, we feel good about where this is going."

As the focus of the bookseller has changed, so have the decision makers. In addition to Mr. Lynch, the senior executives reshaping the business include Jamie Iannone, 38, president of digital products and overseer of everything Nook related, and John Foley, the 40-year-old president of Barnes&

Neither is a veteran book man like Mr. Riggio and his younger brother, Steve, the retailer's former CEO. Mr. Iannone is a graduate of Stanford's business school, with stints at eBay and Booz Allen & Hamilton. Mr. Foley, a former executive at Barry Diller's IAC/InterActive Corp., graduated with an engineering degree from the Georgia Institute of Technology and got an M.B.A. from Harvard.

Barnes & Noble is also hiring on the digital front. Today it's looking for more than 20 technologists for its fast-growing Palo Alto, Calif., technology campus, where an estimated 250 work now.

The retailer currently claims as much as 27% of the e-book market. It hasn't disclosed the costs associated with remaking itself, but its most recent financial reports reflect growing pressures, including the cancellation of its dividend. For the year ended April 30, the company swung to a loss of $73.9 million from a $36.7 million profit a year earlier.

Barnes and Noble can spend their energy better creating book formats that could run on Android and iOS. Why invent e-book hardware when you can reach a wider audience and stick to your core business of selling books by creating a software application that will run on more sophisticated devices like iPad and Android tablets.

Capital expenditures for continuing operations, mostly related to the new digital initiatives and the retailer's website, could climb to $200 million in fiscal 2012 from $110.5 million in fiscal 2011, the company has said. The retailer is also leaving open the possibility of having to raise additional funds.

Keeping up with rivals like Amazon in e-readers may be hard to sustain. Amazon, with market capitalization of $98 billion, is expected to launch a new tablet and two updated versions of its Kindle. Barnes & Noble has a market cap of about $1 billion.

But the new economics of e-book sales have grown more appealing.

Under the recently adopted "agency pricing" model in which publishers set the consumer price of their digital titles and sellers get 30%, Barnes & Noble earns more money on some digital titles than on new-hardcover sales.

For example, it sells the e-book edition of George R.R. Martin's best-seller "A Dance with Dragons" for $14.99, earning $4.50 a sale. Meanwhile, it sells the hardcover edition for $19.25. If it pays half the $35 list price, it would make a profit of $1.75 a title.

"Barnes & Noble is doing a smart job of using their store traffic to build an e-book audience," said Mike Shatzkin, CEO of Ideal Logical Co., publishing consultants. "But eventually customers who buy the Nook will stay home and order from there."

Write to Jeffrey A. Trachtenberg at

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

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