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Barnes & Noble and Microsoft – back to college


Coverage of the Microsoft/Barnes & Noble alliance over the past 24 hours has been copious – the story even appeared above the fold on the front of the UK edition of the FT this morning.

Here’s a series of links to the most thought-provoking articles:

The New York Times provides a succinct summary of the deal.

Bloomberg notes that, last Friday, B&N was worth $800m; at close of trade yesterday, that valuation (essentially for the core superstore business) had jumped to $1.3bn – but the Microsoft/B&N Nook/College deal was valued at much more, $1.7bn.  Bloomberg’s piece has some great lines, including the observation that: “[the] news reflects tech’s prevailing World War I-style balance of power, where an enemy of your enemy is suddenly your best friend”.

Tools of Change’s Joe Wikert is always worth reading, and he notes that a physical retail presence (where Xbox and other Microsoft and Windows 8 hard and software could be showcased) could create real value.

Gigaom is sceptical – Microsoft is taking what it can get; it missed out on overpaying for Yahoo, has it made a sensible deal here, or is Nook just the only game in town?  On the other hand, Philip Jones at FutureBook says that he has been “watching Microsoft dance around the digital reading business for more than a decade, [and] this may be the first time they’d actually worked out a way of doing it well and making money out of it”.

All of this excitement, and no one’s mentioned the much-speculated Waterstones/Nook tie-up (pause to contemplate Waterstones stores as Xbox showrooms).  But I continue to be convinced that, despite the continuing sector upheavals, there is a strong – but different – future for physical retailers.

(After all, there’s really nothing to stop all of us doing all of our shopping online, right now.  But – although online – or, more correctly, multichannel – continues its exponential growth, we aren’t quite making that leap.)

For many years, the Barnes & Noble brand was used by two separate organisations: the publicly-traded superstore business, and the Len Riggio-owned college stores.  In 2009, the two organisations were finally rolled together, but the Microsoft deal separates them again.  This looks smart to me.

B&N’s college stores are much more than campus bookstores – they’re  sophisticated, multi-purpose, student-targeted marketing vehicles.  New stores are opening regularly, selling new and used books, and a wide variety of other student consumables, from educational products to letterman sweaters.  They serve 4.7m students at 650 colleges.  These students are the tastemakers of tomorrow; B&N College already showcases technology (not just Nook), and this audience has to be an attractive one for Microsoft.

Furthermore, college stores tend not to require the sort of real estate investment that stand-alone big boxes demand.  Located on college premises, where faculties want to ensure a bookstore thrives, they have more scope to negotiate their fixed costs down, and to occupy a small but right-sized, on-brand space.

The College division also owns B&N’s old 5th Avenue flagship, which was (bluntly) in dire straits last time I saw it, but is well-located to test a whole new approach to books-plus retailing.

And of course, separating the college stores from the superstore business makes a future restructuring more straightforward.

This isn’t just a tech story, it’s a bricks-and-mortar story too, and in a world of Amazon, Apple and more Amazon, it’s one that has to be vigorously welcomed.

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An Evolutionary Phase – London Book Fair/Fair Dealer article

I’ve spent the last couple of days at the London Book Fair, renewing old friendships, making new ones and hopefully getting some pointers towards business opportunities for the future.

The “London Fair Dealer” is a publication created by Publishers Weekly and BookBrunch, who kindly asked me for a short piece summing up my view of the future.  This was duly despatched in mid-March, and I have reprinted it below.

I’ll follow up with a few thoughts and reflections on LBF itself in the course of the next couple of days.

An Evolutionary Phase

Philip Downer looks at how bookselling is evolving in the face of increasing online sales and digital publishing.

This year’s London Book Fair is taking place at a time of unique change.  The shift from the printed word to the downloaded text is accelerating; chains and standalone bookstores are closing down around the world; and the very future of the book “entity” is being challenged by commentators and industry sages.

It’s the worst time to try and predict the future – but despite this uncertainty, the trade is not without optimism.  The future will be different, exciting and full of opportunity – if only we could be certain what those opportunities will be.

We can, however, be reasonably certain that, while the market for eBooks (and eContent in all its forms) will grow exponentially, the demand for classically published books will not collapse as radically as the markets for CDs (or for road atlases or software manuals).  The market will find room for both formats, with a different physical/digital weighting in each category.  However, I would expect the value of the physical book market to shrink by 30%+ over the next five years.

So, where will these physical books be bought?  The biggest risk is to the traditional, deep range specialist stores.  As new channels (the usual suspects, online and supermarkets) took their share of sales through the mid-late noughties, it became progressively more difficult for store chains to maintain an economically viable backlist that met customers’ general needs.  With the supermarkets taking a larger slice of the best-sellers, and the internet mopping up the long tail, the bookshops’ range became more and more piebald, and too many retail execs started to describe backlist as “wallpaper”.

This doesn’t presage the “death of the bookshop”; rather, I anticipate an evolutionary phase, as we pass from big, general stores to more specialised outlets.  In capital cities and college towns, good bookstores can flourish, thanks to the profile and concentration of the population – but it will be easier to make a living servicing the 100,000 people of Cambridge than the 3.5m spread across metropolitan Birmingham.

The independent store that knows its customers, and has the right pitch in the right town, can survive.  This is not an opportunity to get rich, however; independent booksellers will have to adapt their offer, and not be precious about the route they take, or the diversification they embrace.  They’ll need an online presence, and a willingness to mix new and second-hand books, and other product categories.

In his recent AAP address, Len Riggio painted an uplifting picture of a future in which best-selling, mass-market titles had transferred substantially from physical to digital formats, causing the mass-merchants (ie supermarkets) to scale back their space and commitment to books.  Although supermarket space is flexible (it would increase at Christmas), the limiting of this channel would be good news for specialist bookstores.

I believe that there are significant opportunities to sell more physical books out of non-traditional outlets.  Stores like Urban Outfitters/Anthropologie, Conran Shop and the Royal Horticultural Society sell fluid ranges of the titles that their customers will want to buy this season, at a full mark-up.  There is an opportunity for many more non-book retailers to participate in this space, selling desirable, giftable books (with content least susceptible to digitisation) at full margin to customers who are seeking to accessorise their homes and lives.

Similarly, while the range of children’s apps and content streams will continue to multiply, there is an untapped opportunity to create browsable children’s book offers – whether in focused, book-led stores, or as part of a broader kids offer.

Online sales of physical books will continue to grow.  Recent research1 indicated that Amazon has about 80% of the UK’s online book sales – but no one can seriously participate in the book market without having an online solution.  I would recommend avoiding the obvious frontlist-led offer in favour of a more distinctive editorial voice – but I recognise the cost of this commitment, and would advise booksellers to keep their online offer as simple and focused as possible.

At this early stage in the development of eBooks, we are shooting in the dark as we try to identify the ultimate size of the market, and to understand the channels those “books” will be sold through.

The music market is much further along this cycle than bookselling.  The parallels are far from absolute – books are used in many different ways, and come in many different formats, whereas music is simply sound; fidelity vs portability.  In the US, the paid-for recorded music market (including downloads) has shrunk dramatically, from $73 spend per head in 2000 to $26 per head in 2009 (at constant pricing).2 Record shops are on their last legs globally.

The music business imploded in slow-motion across a decade, with plenty of mis-steps and no prior experience to draw upon.  Where has all the activity gone?  In part, to illegal downloads.  But absolute consumption has also fallen, simply and dramatically, as music consumers have found other ways to spend their time and money – gaming, phone apps and online gambling are three examples of entertainment categories that barely existed when recorded music was at its peak.

The book trade has a better opportunity to predict and shape its market evolution, and to plan accordingly.  Various individual entities – publishers, Nielsen, B&N, Amazon, Apple etc – have some insight into the behaviour of download purchasers, but there is insufficient objective data in the public domain, and no consensus at this time on the shape of the download market, and the behaviour of customers.

The range of challenges within ePublishing is huge – pricing; formats; copyright control and piracy (particularly in the growth economies); “traditional” publishing vs self-publishing (the wave of stories about self-published Kindle millionaires has a whiff of dotcom bubble about it); marketing and the “browsing experience”; and the power and wealth of Apple, Google etc.

Nevertheless, bookselling has reinvented itself many times over recent decades – chains and superstores may, like book clubs, have had their day in the sun.  The reinvention will continue.  Publishing in the new world will be radically different – the changes will be greater and more global than those created by (say) the growth of paperbacks, the amalgamation of houses, or by the end of price maintenance.  Redefining the nature of the book redefines the roles of both bookseller and publisher.  I firmly believe that however future developments work out, there is a crucial role for both.  Enjoy the Fair!

Notes:

1.  Institute of Direct Marketing research, reported in the Bookseller 9 March 2011:  http://www.thebookseller.com/news/amazon-has-80-online-share-claims-new-survey.html?utm_source=twitterfeed&utm_medium=twitter

2.  Business Insider 18 February 2011: The REAL death of the Music Industry:  http://www.businessinsider.com/these-charts-explain-the-real-death-of-the-music-industry-2011-2



More 18th century retail techniques – tea, anybody? Plus, old books & Len Riggio

Sometimes I wrap my head in wet towels and stare at the suburban landscape in a fever of uncertainty.  EVERYTHING IS CHANGING!  OLD PARADIGMS NO LONGER APPLY!  How can any of us prepare for anything in an uncertain tomorrow?

I turn to my favourite old management books (Robert Townsend’s Up the Organization still #1 after all these years) and I calm down, reminded of a salient fact.  Technology may change, but human nature remains fundamentally the same – sure, perhaps we have shorter attention spans in this generation, or the population is carrying more poundage round the middle than it should, but, beneath all the neophytism, is good old human nature.

So, as it’s Friday, let’s return to the eighteenth century, once again courtesy of Judith Flanders.  Today, our subject is tea, which was once as exciting as smartphones and windpower, and caused a far-reaching ruckus in Boston harbor – in the 1770s, around 10% of all expenditure on food and drink in England went to tea and sugar.

Tea had not conquered the market on its intrinsic worth alone.  From the late eighteenth century, it was heavily advertised… [with] many advertisements centred on competitive pricing: one merchant was “determined to sell tea at such low prices as the public have a right to expect”, another, heroically, aimed “at profits only sufficient to defray expenses, wholesale and retail”.  Many claimed to be selling tea more cheaply than anywhere else; others advertised reduced prices for bulk purchases…

Some used the “loss-leader”, selling sugar at below-cost prices with the purchase of full-price tea; others gave a lottery ticket free on the purchase of a pound of tea; some offered customers “a new treatise on tea”, available, not by coincidence, with the purchase of tea; still others advertised money-back guarantees if the customers were dissatisfied; some promised to match wholesale prices, or even to undercut them…

Edward Eagleton of the Tea Warehouse in Cheapside advertised reduced prices, fixed prices for cash, mail-order sales… and sold entire chests of East India Company tea to small shopowners with only a 1% mark-up…  Tea was packed and marked with the “Sign of the Grasshopper”, with a money-back guarantee and the motto “Taste, try, compare and judge”.

Tea 18th centuryImage from www.food-info.net

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Back to the twentieth (yes) century… the Guardian  carried a farewell to second-hand bookshops on Wednesday.  A profound change has taken place to our towns, mostly unremarked, mostly on the margins, and greatly missed.

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And (finally) back to 2011, and Len Riggio’s keynote speech to the AAP.  An address both upbeat and uplifting, he makes the interesting observation that, if the mass market for fiction moves markedly to digital formats, mass merchants will “downsize or abandon their sale of books”.  Books are no more “core” to Wal-Mart or Tesco than VCRs or Walkmans, and if the profit-per-shelf-metre on books drops below a critical level, supermarkets’ commitment to books will fall exponentially.

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Charivaria

I am reading: Consuming Passions by Judith Flanders (Harper Perennial) – link above

I am listening to: Shostakovich Piano Trio No. 2

I am watching: the Japanese tsunami, suddenly and shockingly, as I write this

Quote of the Week: Uncertainty about the economy has left Britain like a “country waiting for its exam results” – Charlie Mayfield, Chairman of JLP